Finance Bill

Public Bill Committee, 20 May 2003.

Standing Committee B

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton (Conservative, Macclesfield)

I welcome all members of the Committee to this sitting. Goodish progress is being made, and I hope that that will be continued. The friendly environment that exists across the Committee is to be commended.

I believe that it has been indicated to you that there was a mistake on the provisional selection list issued yesterday. Clause 23 was listed in the wrong place. A new selection list has been produced, with clause 23 listed after clause 21 in accordance with the order of consideration. I hope that hon. Members in all parts of the Committee will take account of that.

George Howarth (Labour, Knowsley North and Sefton East)

On a point of order, Sir Nicholas. The Official Report for the morning sitting of the Committee on Thursday 15 May shows in col. 31 that I responded to an intervention from the hon. Member for East Carmarthen and Dinefwr (Adam Price), saying:

''Betting exchanges are not involved in that and because they do not participate in the levy, racing does not benefit from it in any way.''—[Official Report, Standing Committee B, 15 May 2003; c. 31.]

I should point out that I was mistaken in that assertion, and that betting exchanges do participate in the levy. I should like to take this opportunity to correct that.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman has been courteous in drawing that matter to the Committee's attention. I know that his apology will be accepted and noted by the Committee. I think that that is the appropriate courtesy and I commend him on the action that he has taken.

Stephen O'Brien (Conservative, Eddisbury)

On a point of order, Sir Nicholas. I seek your guidance. I note that on the provisional selection list, under clause 34, amendments Nos. 123 and 124 are listed to be taken, at your discretion, with amendment Nos. 131, 132 and 120, I dare say for the convenience of the Committee. For the sake of clarification, amendments Nos. 123 and 124 relate to clause 34, whereas amendments Nos. 131 and 132 relate to clause 35 and amendment No. 120 relates to clause 36.

The arguments on amendments Nos. 131, 132 and, to a degree, 120 coincide, but the arguments on amendments Nos. 123 and 124 are different and distinct. Therefore, it might be worth considering whether it would be for the convenience of the Committee to contemplate taking amendments Nos. 131 and 132 on clause 35 and, likewise, amendment

No. 120 on clause 36, although we could discuss clauses 35 and 36 as a package.

Nicholas Winterton (Conservative, Macclesfield)

I am grateful to the hon. Gentleman for drawing that matter to the Committee's attention. If it is his suggestion that the amendments that have been selected to be considered together should be split, I shall certainly give that some thought. If the hon. Gentleman and the Government are happy that they should be split, I am sure that that can be arranged. I am grateful to the hon. Gentleman.Clause 19 Face-value vouchers

Clause 19 - Face-value vouchers

John Healey (Labour, Wentworth)

Members of the Committee will recall that in the 2002 Budget we set out an important package of measures to tackle VAT avoidance, and we have made strides since then in reforming the VAT system to prevent abuse and revenue leakage.

As part of that package of measures we announced that, after consultation on the details, we would legislate at the earliest possible opportunity to stop revenue leaks resulting from loopholes in the VAT treatment of face-value vouchers. We do so now in clause 19. By face-value vouchers I mean vouchers, cards and the like that can be exchanged for goods and services, the most common examples of which are gift vouchers and telephone cards.

I can give the Committee a practical example of the problem. Under the old VAT rules, if the issuer of a voucher with a face value of £10 sold it to a retailer for £8, we would collect the VAT not on the £10 for which it was sold on to the customer but only on the £8 for which it was sold to the retailer. In effect, the retailer's mark-up of £2 was VAT-free. That loophole was also being used for avoidance purposes, because some businesses were selling face-value vouchers to associated companies at an artificially large discount. The vouchers were then sold on to customers at the full price, with the businesses having to account for VAT only on the original, small, discounted price.

As with other revenue leakage and avoidance, two concerns arise. First, the taxpayer has a right to expect us to collect all the VAT due on the purchase of goods and services; and secondly, businesses have the right to expect fair competition, instead of seeing other businesses gain an unfair advantage by artificially reducing their VAT bills. Therefore, we are legislating in clause 19 and schedule 1 to close that loophole.

Intermediate suppliers such as the retailer or the associated company in the examples that I have given will be required to account for VAT on the full amount for which they sell face-value vouchers on to their customers. Consumers will not have to pay more. A £10 voucher will still buy £10-worth of goods or services.

It may be helpful if I draw the Committee's attention to two specific aspects. First, the clause includes a provision to tackle the specific avoidance scheme whereby a voucher is provided alongside other

goods or services to reduce the taxable value of the sale. Secondly, I want to reassure the Committee that the VAT-free status of certain goods and services has not been altered by the changes. Postage stamps, for instance, are unaffected. We have also ensured that, if vouchers are exchanged for zero-rated goods such as books, the VAT liability of those vouchers may be adjusted accordingly.

The changes follow the original Budget 2002 announcement and the consultation with affected businesses that followed. In the technical operation we aim to ensure that the benefits of the changes are proportionate to the costs that they impose on the businesses. I believe that the changes are proportionate and further show our commitment to tackling revenue losses in the VAT system. I therefore commend the clause to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

I thank the Minister for setting out the background to the clause, with which he will note that schedule 1 is coupled. I was proposing to take the amendments to schedule 1 separately, if that is called, but I am happy to take them together, if that is your wish, Sir Nicholas.

The Chairman indicated assent.

Stephen O'Brien (Conservative, Eddisbury)

I am clearly being encouraged to proceed with the amendments to schedule 1. The stand part debate on clause 19 will be wrapped up into my discussion of the amendments to schedule 1.

This is a complicated subject, with quite a history. As the Economic Secretary says, a company such as Marks & Spencer may sell a gift voucher to a customer for £10 with a face value of £10. However, members of the Committee will be aware that it sometimes sells such vouchers at a discount to another business, which will then sell them on at the face-value price or even give them away. For example, M&S might sell to the intermediary business a £10 gift voucher for £9. I dare say that we have all had offers through the post in which an M&S voucher is part of the deal if we are tempted by the products or services on offer in the envelope—never a wise move.

Under the old law, M&S had no VAT charge when it issued the voucher. When the voucher was redeemed for £10-worth of goods or services, M&S would be liable to VAT on only the amount for which it had sold the voucher. Therefore, it would be only £9 if the voucher had been sold for £9. The intermediary's profit of £1 escaped VAT. I am sure that the Economic Secretary will correct me if that analysis is erroneous, but I believe that that is how the scheme has worked.

Some businesses—presumably not M&S—were abusing the system by issuing vouchers to an associated intermediary at a big discount; for example, selling a £10 voucher for £6. The intermediary would sell it on for £10 to an ultimate recipient, who would use it to acquire goods or services worth £10, but VAT was only ever collected on £6.

As the Economic Secretary said, Customs and Excise issued a consultation paper entitled ''Modernising the VAT Treatment of Face Value

Vouchers'' in June 2002, which ventilated various ways in which the problem might be tackled. I hope that the question of what changes were made to the Government's original proposals as a result of the consultation will not be contentious, not least because it appears that there may be some technical difficulties, which I shall discuss as I now come on to specific amendments to address the problems that I have identified. It is important to understand where the Government started and where they ended up as a result of consultation.

The Government have chosen not to levy VAT on the issuer at the time of issue. I shall call the issuer party A. We may keep M&S in mind, but I would not want it to feel that I was touting it, particularly as it has announced better recovering profits this morning. The intermediary, or party B, must pay VAT on the £10 when it sells the voucher on, and party A would be liable to VAT on £6 when the voucher is redeemed—so far, so clear. That is achieved by paragraphs 4 and 6 of new schedule 10A, which will be added to the Value Added Tax Act 1994 by schedule 1 of the Bill.

Of course, that would be overkill, because Customs would collect VAT on £16. The missing piece of the jigsaw is that party B is meant to be able to deduct input VAT as if—those two words are very important—party A's sale of the voucher to it were standard rated. Such a provision is not in the Bill at present, although presumably the Government intend to introduce it. By that, I pray in aid paragraph 5 of VAT information sheet 03/03 entitled ''What is the position with regard to input tax recovery?'', which was published at the time of the Budget. It states:

''Intermediate suppliers will be entitled to recover input tax, subject to the normal requirements. The liability of the sale is deemed''

—hence, the importance of the phrase ''as if'' that I used earlier—

''to equate to the underlying supply of goods or services. If it is known that the FVV''

—the face-value voucher—

''has been redeemed for zero-rated goods or services then the intermediate supplier can make an adjustment to both the output tax and the input tax to reflect the liability of the final supply. Adjustments can be based on retail scheme percentages or other overarching calculations rather than tracking individual FVV.''

Note 5 of the document goes on to say:

''Where an intermediate supplier is purchasing an FVV from the issuer who takes on the obligation to accept it, and is not required to account for VAT until the FVV is redeemed, the intermediate supplier may treat the amount of VAT that will be due on the supply as their input tax at the time the purchase is made.''

Finally, note 5 says:

''It is suggested that the issuer should produce an invoice to facilitate an intermediate purchaser's input tax recovery. However, to ensure the issuer does not account for output tax on this invoice (because issuers who undertake to redeem the voucher do not have to account for VAT until the voucher is redeemed) it is suggested that the invoice is annotated with the following wording, 'the issuer of the voucher will account for output tax under the face value voucher provisions introduced in Budget 2003'.''

The best way to tackle the problem seems to be to ensure that that wording appears in the Bill—which will become statute if the Government get their way—through amendment No. 89. That amendment

specifically addresses that point, giving intent to what the Government have set out in their information sheet: that VAT is levied on £10 and £6. Importantly, amendment No. 89 also enables recovery of VAT on the £6. The legislation would therefore give the necessary clarity and a demonstration in law of what is already in note 5 of the VAT information sheet.

Such a measure is supported not only by the Chartered Institute of Taxation but in more direct terms by the Institute of Indirect Tax and the Institute of Chartered Accountants in England and Wales. The Institute of Indirect Tax put it in slightly more blunt terms, saying:

''This is another instance of Customs seeking to collect tax from an innocent third party where they cannot collect it from the person who actually owes it. Paragraphs 3(3) and 4(4) of the new Schedule 10A, introduced by Schedule 1, hold the issuer of a voucher—such as a record token or a phone card—or any intermediate purchaser, liable for payment of the VAT on the supply of the goods or services made by a third party against the voucher.''

Although that institute has identified the problem, it has not identified a solution, which is what amendment No. 89 is intended to do.

The Institute of Chartered Accountants in England and Wales says:

''We believe that the proposed treatment of face-value vouchers in new Schedule 10A ,VATA 1994 is not appropriate. This is because it fails to recognise the true nature of such vouchers as a means of payment for goods or services which are VAT-exempt. The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person supplying goods or services paid for by their use. This could well be outside the issuer's control''.

The Institute of Chartered Accountants then makes the point that that

''may be an infringement of human rights.''

Finally, it adds:

''The proposals are likely also to result in more tax being collected than is properly due. In many cases where vouchers are used to obtain goods or services chargeable at the zero or lower rate of VAT the proposals will result in tax being due at the standard rate on vouchers supplied through intermediaries. This would appear to breach the fundamental principle of VAT that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply.''

The Minister referred to the Government's view that they are proposing a proportionate position. Clearly that is disputed by those whom the Government sought to consult. That is why I earlier put a question about the changes in what the Government originally proposed and the adjustment made in the light of that consultation. That is an important part of the argument.

Amendment No. 90 relates to another matter arising under clause 19 and schedule 1. Organisations such as Book Tokens Ltd., which have a central issuer that is not a retailer so cannot itself redeem the vouchers, are catered for by paragraph 3 of new schedule 10A. There is essentially no change to the present law. However, certain types of voucher—Marks & Spencer vouchers are presumably an example—may be redeemed for a zero-rated item, such as food. Such a situation is catered for by paragraph 6 of new schedule 10A. If the situation arises, there is retrospective adjustment to B's position. However, implementing the practice could be quite

tiresome if A and B were independent parties, which certainly challenges what the Economic Secretary said in his opening remarks about introducing measures that were ''proportionate to the costs'' to businesses. If A and B were independent parties, the practice would be burdensome.

A flaw in the new provisions is that they could upset existing contractual arrangements. Amendment No. 90 relates to that point. Under paragraph 4 of schedule 1, the new law applies only to vouchers issued on or after 9 April 2003. However, party B, the intermediary, might, before that date, have entered into a contract with party A to buy vouchers in the future for fixed prices. In such a case, B will find that instead of making a profit of £1 when he buys a voucher for £9 and sells it for £10, he will make a profit of 85p after meeting the VAT on the £1. That is why an amendment should provide that, where the parties are independent, the new law does not apply to vouchers issued pursuant to contracts made before 9 April.

Those are the explanations for what I hope are perceived as carefully considered and constructive amendments. Together with those who help and advise me, I arrived at the amendments as a result of many representations, some of which criticised the clause in robust terms. Recognising the Government's arguments, I have tried to find a genuine technical solution and achieve the necessary clarification and balancing of the issues. I hope that the Government will accept the amendments.

Nicholas Winterton (Conservative, Macclesfield)

I have to say to the hon. Gentleman that they cannot do that at this moment, because the amendments will be dealt with in a subsequent debate. The Question before us is whether clause 19 should stand part of the Bill. I have allowed the Opposition spokesman to make considerable reference to amendments that relate to schedule 1, but if the Opposition want to vote on those amendments, they will have to wait until the relevant stage. I must say that when we move to schedule 1, I trust that only brief reference will be made to the amendments that I have allowed to be covered under clause 19.

David Laws (Liberal Democrat, Yeovil)

We understand entirely the concerns that have induced the Government to introduce the proposals in the clause and schedule 1. The Economic Secretary clearly set out the case for taking action. We understand that, under the existing legislation, tax losses arose in some circumstances when intermediate suppliers sold face-value vouchers. It therefore seems sensible of the Government to introduce measures to tackle that. However, we share many of the concerns set out by the hon. Member for Eddisbury (Mr. O'Brien), and we support the amendments, which we will debate in greater detail later.

As the hon. Gentleman mentioned, there seems to be a certain overlap between the debate on clause 19 and the debates that we had the other day on clauses 17 and 18. Given the lack of time, I do not want to put us into reverse and revisit those debates. As the hon. Gentleman mentioned when he cited the comment of

the Institute of Indirect Taxation, this is another instance of Customs possibly seeking to collect tax from an innocent third party when it cannot collect it from the person who actually owes it. The Economic Secretary will be aware that the Chartered Institute of Taxation, the Institute of Chartered Accountants and the Institute of Indirect Taxation have expressed several concerns about the clause. The hon. Member for Eddisbury set out those concerns clearly, and I will not go over the ground that he covered. The Chartered Institute of Taxation questions whether the Government's measures are consonant with the sixth VAT directive. I would be grateful if the Economic Secretary indicated whether he thinks that the measures are consonant with that directive and whether he received specific advice on the point.

More broadly, the Institute of Chartered Accountants sums up the major criticism of the clause when it raises the issue of fairness. It states:

''The proposals are also likely to impose an unfair liability by requiring the issuer of such vouchers to bear any tax not accounted for by some other person'',

and that takes us back to our debates on clauses 17 and 18.

The hon. Member for Eddisbury also discussed the substantive issue of fairness in relation to face-value vouchers, which are used in payment for a wide variety of goods on which VAT levels may be varied—zero or lower rate VAT or standard rate VAT. There is concern about whether the way in which the Government intend to deal with the issue will breach the fundamental principle of VAT, which is that the tax collected in relation to a particular supply of goods or services should be proportionate to the value of that supply.

The hon. Member for Eddisbury has introduced some fairly sensible proposals and amendments. We hope that the Economic Secretary can respond to them.

Jonathan Djanogly (Conservative, Huntingdon)

I congratulate my hon. Friend the Member for Eddisbury on his clear explanation of the problem. Although double taxation should obviously be avoided, given that an issuer does not charge VAT on the supply of face-value vouchers to an intermediary, it is difficult to find a legal basis for an input tax deduction by an intermediary. It is questionable whether VAT charged on the supply of goods and services should be regarded as an input tax of the intermediary who purchased the face-value vouchers. I therefore support amendment No. 89, which would address that situation.

It is worth noting that the Chartered Institute of Taxation considered it ''extraordinary'' that such important matters—input tax deduction and invoicing—will be dealt with on an extra-statutory basis. It suggests that both input tax deduction and invoicing should be dealt with in statute, and I agree.

John Baron (Conservative, Billericay)

I shall briefly concentrate on two issues, both of which have been touched on, but both of which bear dwelling on. The

first relates to the unfairness of the scheme and the second its practical implications.

On unfairness, the clause is another instance of Customs and Excise seeking to collect tax from an innocent third party when it cannot collect it from the person who owes it. Paragraphs 3(3) and 4(4) of schedule 10A to the Value Added Tax Act 1994, which is introduced by schedule 1, hold the issuer of a voucher, such as a record token or a phone card, or any intermediate purchaser liable to pay the VAT on the supply of goods or services made by a third party against the voucher. Several Members have discussed that issue, which is clear. The provision is unreasonable if the failure to account for the tax is outside the issuer's control or influence. I ask the Economic Secretary to give that some thought because it will have practical implications for the commercial world.

I shall dwell for a second on the practical difficulties of the clause, and I would welcome the Economic Secretary's thoughts on them. Practical difficulties arise in connection with the charge to tax under paragraph 6(5) of new schedule 10A in respect of the face-value vouchers specified in paragraphs 4(4) and 6(2). It is important that the consideration for the supply is apportioned on a fair and reasonable basis between exempt, zero-rated, reduced-rated and standard-rated elements.

Such a fair and reasonable basis would reflect the sales mix of the persons who eventually redeem the vouchers for goods or services, and it should take into account any difference in the mix of cash sales and voucher exchange sales. It is unclear from the clause how the person supplying the voucher is supposed to arrive at even an approximation of the mix, and I would welcome some explanation from the Economic Secretary as to how the clause would deal with that issue.

Michael Jack (Conservative, Fylde)

I rise briefly to support the comments that have been made and to pay tribute to my hon. Friend the Member for Eddisbury on the way that he introduced our views. I, too, am concerned that the proper level of VAT be collected for those who have a liability. Once again we seem, as the hon. Member for Yeovil (Mr. Laws) suggested, to be replicating the line of argument that we had on for clauses 17 and 18. In that case, the Economic Secretary was able to demonstrate some real-world examples of where such fraud had been perpetrated, from the fields of telecommunications, computers and chips. However, so far the Economic Secretary has given us a theoretical construct with no practical examples.

I am concerned about how the measure will work where one has face-value vouchers. How would it work, for example, if the Virgin group, which has interests in zero-rated services such as transport and full VAT services such as selling music CDs, were to do a deal with the Kellogg's company and put vouchers on the back of Corn Flakes packets which could be redeemed against any products sold by the Virgin group? Will the Economic Secretary tell us whether that problem exists in other parts of the European Union covered by the sixth VAT directive? If it does, how is it dealt with abroad? If not, why does

the United Kingdom appear to be unique as far as that problem is concerned?

John Healey (Labour, Wentworth)

I explained the purpose of clause 19 in my earlier remarks. This is no trivial issue. Hon. Members have talked about a sense of proportion. The total revenue loss this year is estimated through a combination of leakage and avoidance to be around £105 million.

Michael Jack (Conservative, Fylde)

To put the £105 million in perspective, will the Economic Secretary tell us how much VAT is collected in those areas where the proper rate has been paid?

John Healey (Labour, Wentworth)

I was not seeking to make a point about the proportion, but the total revenue lost from VAT as a direct result of the existing loophole in legislation, which clause 19 and the associated schedule will plug.

As with other forms of revenue leakage and avoidance, the concerns that I have explained are twofold. First, the taxpayer has a right to expect the Government to collect what is due on the purchase of goods and services. Secondly, business has a right to expect that we shall prevent others from gaining an unfair advantage by reducing their tax and VAT bills. The Opposition amendments to schedule 1 reflect genuine concerns that have been expressed in some quarters. They were well argued and are well intentioned, but they are ultimately unnecessary and, to a degree, misguided.

Amendment No. 89 would specify that an intermediate supplier is entitled to claim input tax on the supply of vouchers to him by an issuer who redeems the voucher. I assure the hon. Member for Eddisbury and other hon. Members that that is our intention. Intermediate suppliers of face-value vouchers are already entitled to reclaim VAT paid on the purchase of the vouchers, and it is unnecessary to complicate the legislation further.

The hon. Member for Eddisbury suggested that that might be overkill and asked whether a second party can reclaim VAT. The answer is yes. It is not overkill because the second party will sell the voucher for more than it was purchased for. That will have the effect that we intend of being able to tax appropriately the mark-up on the transaction.

Jonathan Djanogly (Conservative, Huntingdon)

The Minister keeps referring to our amendments being unnecessary. Our intention is to elaborate on what the Minister proposes to clarify and to react so that there is less chance of further upset and avoidance.

John Healey (Labour, Wentworth)

I entirely accept that that may be part of the reason, and it is a proper reason for debate in Standing Committee. I do not want the hon. Gentleman to misunderstand me. I am not discouraging him from tabling or speaking to such amendments or properly probing me as the Minister responsible for this part of the Bill.

Amendment No. 90 would delay the effects of the new legislation, but the change was well trailed during the consultation process, which began last June. Nevertheless, I recognise that some businesses are

experiencing difficulties with the transition to the new arrangements, and Customs and Excise is working with the firms affected to help them through that. We aim to publish detailed guidance by the end of May.

Michael Jack (Conservative, Fylde)

In the light of that helpful observation, may I ask the Minister if he will undertake to write to the bodies that have made representations to the Committee explaining his position, so that, even at this late stage, they may have the chance further to consider his views and, if necessary, to comment before the Bill is enacted?

John Healey (Labour, Wentworth)

I am confident that the businesses affected are already in close contact with Customs and Excise officials, but I shall be happy to arrange for our officials to ensure that those who are affected have a copy of our proceedings in which they will be able to read the points made by the right hon. Gentleman and his hon. Friends and any points that I make in response. I hope that that covers the point that he is concerned about.

On the specific concerns of the hon. Member for Eddisbury, although amendment No. 90 seeks to address the loss of VAT through increased opportunity for avoidance during the period of delay, avoidance is not the only source of revenue loss to the public purse. VAT to the order of £30 million will be lost through leakage on legitimate sales of vouchers during that period. That revenue would have to be found from elsewhere.

The hon. Gentleman asked about the consultation period dating back to the original announcement in the pre-Budget report 2001 and the confirmation of our plans in the 2002 Budget. The consultation has helped us to refine our thinking considerably, as we have gone along. The main change is to move from seeing sales by intermediate suppliers as a standard-rated sale of goods to a supply of services. That is important, because it give intermediary sales the flexibility to reflect zero-rated supplies—for books, for instance.

It is worth reminding the Committee of the genesis of the clause and schedule. There was an announcement in the pre-Budget report of 2001 and confirmation in the Budget of 2002 that we would consult businesses that could be affected, a consultation paper was issued in June 2002 running through to the end of October 2002, and on Budget day 2003 an information sheet, to which the hon. Member for Eddisbury has referred, was published alongside a summary of responses to the consultation. In addition, as a result of detailed discussions between Customs officers and many businesses and representative organisations, detailed guidance is in the pipeline, and we aim to publish it by the end of this month.

Jonathan Djanogly (Conservative, Huntingdon)

The Economic Secretary has referred to the consultation that the Government have undertaken in respect of the proposed changes. Why did he not mention and analyse the consultation in his opening remarks? Did issues emerge from it that he does not want to address? It seems strange.

John Healey (Labour, Wentworth)

In my opening remarks, I gave an explanation that I felt was succinct and helpful to the

Committee. I am elaborating on it now in response to points raised genuinely and properly by Opposition Members. I hope that that combination and the sum total of our discussions will adequately deal with the points that the hon. Gentleman and others may be concerned about.

The hon. Member for Eddisbury asked about the issuing of a VAT invoice to an intermediate supplier and the question of annotation. I confirm that we will need to issue a VAT invoice to the intermediate supplier when supplying face-value vouchers to them. If they wish, issuers can annotate those invoices to avoid confusing other VAT accounting procedures. In other words, the annotation is purely a suggestion to aid the identification of invoices. It is not compulsory.

The hon. Members for Yeovil and for Billericay (Mr. Baron) were worried about the collection of tax from innocent third parties, and the hon. Member for Huntingdon (Mr. Djanogly) urged me to give the matter further thought. We are giving it careful thought in the production of the more detailed guidance. The arrangements that we propose are intended to simplify accounting procedures and guard against tax avoidance schemes. Customs will publish a statement of practice detailing when VAT would be collected from the third party. There is no intention to collect from anyone VAT that is not due from them.

Concerns were also raised about another party's liability. Such a liability will arise only in the event of identified tax avoidance, where a trader deliberately sets up another company to supply goods or services and that company has no intention of accounting for VAT on the amount that it receives from the initial supplier of the voucher.

The hon. Member for Huntingdon asked about the use of extra-statutory concessions in implementing the provisions. Extra-statutory concessions are not required. What will be required is an agreement of the procedures to be used by the business and its appointed Customs officer, which is normal in VAT assurance work, as he will know. That happens in many other cases, such as partial exemption agreements and retail schemes.

John Baron (Conservative, Billericay)

Will the Economic Secretary elaborate on an earlier point? The fact remains that Customs and Excise will be seeking to collect tax from a potentially innocent third party where it cannot collect it from the person who actually owes it. I did not detect anything in the Economic Secretary's remarks to contradict that. Will he elaborate on that unfair aspect?

John Healey (Labour, Wentworth)

I have tried to explain why we do not believe that that is unfair and that we will look to collect tax only where it is due.

On the question of comparative regimes in other European Union states, raised by the right hon. Member for Fylde (Mr. Jack), the majority of other member states account for tax on the sale of the voucher. They do not permit the cash-flow advantage currently found in the UK, where VAT is accounted

for only on use. The right hon. Gentleman may be encouraged to hear that the European Commission has not come to a definitive view on the correct treatment of vouchers beyond the fact that tax must be collected.

That leads me to the point raised by the hon. Member for Yeovil on consistency with the sixth directive. As he would expect, this measure has been fully cleared through the Council. It is entirely consistent with the sixth directive. Specifically, it complies with article 2 of the first directive, which states that tax is due on what the consumer pays. There is no infringement of the Human Rights Act 1998 as this measure collects VAT, as I have said, only where it is due.

I recognise and welcome the understanding that the hon. Members for Yeovil and for Eddisbury have displayed of the concerns that lie behind the clause. I am glad that they accept, by implication, that measures are needed to tackle such tax losses. On the basis of my explanation, I hope that they will reconsider and agree not to press the amendment. Otherwise, I shall ask my hon. Friends to reject it and support the clause as it stands.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Economic Secretary for having taken the time to address the difficulties that we have identified. I believe that Committee members are as one in agreeing that any revenue loss amounting to £105 million is a serious matter. None of us seeks to prevent the Revenue from being able to collect its due revenue in a proper manner. It is therefore right to say—I note that the hon. Member for Yeovil also said this—that both sides of the Committee more than imply that these measures are necessary; they say explicitly that they are required.

One part of the Economic Secretary's response to our amendments was interesting. It is of some comfort that the representations made by the industry in the consultation have meant that sales by intermediaries have been moved from the standard rating for the supply of goods to that for the supply of services, thus enabling flexibility, but that has not directly dealt with the difficulty that resulted in our moving amendment No. 89.

Nicholas Winterton (Conservative, Macclesfield)

Order. I must say that the hon. Gentleman has not moved amendment No. 89; that will come later when we debate schedule 1.

Stephen O'Brien (Conservative, Eddisbury)

I am most grateful to you for ensuring that I keep on the technical straight and narrow in terms of procedure, Sir Nicholas. As you are Chairman of the Procedure Committee, I would expect no less.

Amendment No. 89, which it is clear that I shall move, is well intended. I have listened carefully to what the Economic Secretary had to say. He said that it is not the Government's intent to collect VAT from anyone where it is not due, given that the annotation cited in paragraph 5 of the note from the VAT information sheet 03/03 is not compulsory. The clear intent, which both the representations that we have received and our own analysis suggest is right, is set out in paragraph 5, and there seems to be no countervailing argument to convince me why it

should not appear in the Bill. Therefore, I shall in due course urge my colleagues to press amendment No. 89 to a vote.

As far as amendment No. 90 is concerned, I was interested to note that the Economic Secretary thought that the amendment would result in a loss of £30 million. If that were to prove to be true, we would not want to be party to it. Following the points ably put by my right hon. Friend the Member for Fylde on whether the Economic Secretary should write to all the bodies and institutes who have given advice, I would certainly urge him to do so.

The Economic Secretary claims that all the businesses that may be affected are already in touch with Customs and Excise. Given that contracts are in train, there may be some who would be affected, however much consultation took place in earlier months. That should be advertised widely, and we need the Economic Secretary's assurance that that will be properly and thoroughly addressed. On the basis that I hope that the Economic Secretary will be able to give that reassurance, I would not press amendment No. 90. At this stage, however, I have not been convinced that we should not press amendment No. 89 to a vote.

Question put and agreed to.

Clause 19 ordered to stand part of the Bill.

Schedule 1 - VAT: Face-value vouchers

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 89, in

schedule 1, page 142, line 7, at end insert—

'(6) Where—

(a) a person who is not its issuer makes a supply of a facevalue voucher,

(b) that supply is chargeable by virtue of the previous provisions of this paragraph and is not an exempt supply by virtue of those provisions, and

(c) the consideration given by him for the voucher is by virtue of paragraph 4(2) not chargeable or not on its full amount,

that person shall be treated for the purposes of this Act as if the consideration given by him for the supply to him of the voucher, insofar as that consideration was not actually chargeable, included tax at the relevant rate.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 90, in

schedule 1, page 143, line 1, leave out paragraph 4 and insert—

'4(1) Subject to subparagraph (2), the amendments made by this Schedule apply to supplies of tokens, stamps or vouchers issued on or after 9th April 2003.

(2) The amendments made by this Schedule shall not apply to the supply of any token, stamp or voucher issued pursuant to a contract made before 9th April 2003 between the issuer and the person to whom he issues it, unless those persons were on 8th April 2003 connected with each other within the meaning of section 839 of the Income and Corporation Taxes Act 1988.'.

It may well be that the Opposition spokesman wishes to speak to the amendment, but I shall permit very few remarks if he feels that that is necessary, because he has dealt with both the amendments at some length under clause 19. [Interruption.] I do not

want applause from the Government; it creates grave embarrassment for the Chair.

Stephen O'Brien (Conservative, Eddisbury)

I intended merely to move the amendment formally.

Nicholas Winterton (Conservative, Macclesfield)

That is the first time that my advice has been taken.

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 17.

Clause 20 - Supplies arising from prior grant of fee simple

John Healey (Labour, Wentworth)

Members of the Committee will recall that the last Budget contained an important package of measures to deal with VAT fraud and avoidance. They will also be aware of some of the strides that we have since made in reinforcing the VAT system against abuse and revenue leakage. In the 2002 pre-Budget report, we announced immediate action to tackle a highly threatening avoidance scheme involving the sale of new freehold commercial buildings. It may help if I outline the background of the scheme and, therefore, of clause 20.

Normally, the supply of commercial land and buildings is exempt from VAT. However, the European Union's sixth VAT directive specifically deems the supply of new commercial buildings to be taxable, and in the UK we have traditionally taken the definition of new building to be one that is sold within three years of its construction.

VAT is usually due on the sale of a commercial building at the time of legal completion. However, in some circumstances, the final selling price is not known at that point, which can cause complications

in determining the VAT liability of the sale. Therefore, a trade facilitation measure was introduced in 1993 that allowed VAT to be declared at the time payment was received rather than at the legal date of the sale.

Regrettably, as unfortunately often happens, a measure introduced to help the majority of businesses has been undermined by a minority of businesses and their tax advisers, who saw it as an opportunity to exploit the rules and to avoid tax. They contrived to ensure that the final selling price on the new building remained uncertain. They then ensured that the bulk of the payment was made after three years, when the VAT liability of the building automatically changed from taxable to exempt.

Therefore, we took action to block such avoidance schemes in last November's pre-Budget report by amending the secondary legislation that governs the VAT treatment of commercial buildings with effect from 28 November 2002 in order to block future avoidance schemes and safeguard some £165 million that we estimated would be at risk each year if the scheme went unchallenged. In clause 20, we are taking the opportunity to strengthen and simplify anti-avoidance legislation. We are taking steps to ensure that it does not impose undue burdens on businesses that are not engaged in avoidance.

The clause provides that on sales of new commercial properties made on or after Budget day, the liability of payments made after three years will remain taxable and standard rated. In other words, all the uncertain payments for the freehold of a new building will be taxable if the freehold was granted on or after Budget day. Like the changes introduced in the pre-Budget report, the clause will also block avoidance involving the sale of vacant land and the subsequent construction of a commercial building. Deferred payments for the freehold of bare land will be exempt, subject, of course, to the option to tax, even if a new building is later constructed on the land.

As a consequence of the clause, the changes to the VAT regulations made at the time of the pre-Budget report will be considerably simplified and made less burdensome for non-avoiders. A separate statutory instrument was laid on Budget day to amend the regulations to do just that.

David Laws (Liberal Democrat, Yeovil)

Can the Economic Secretary give us some indication or confirmation of the economic effects of clause 20 on Exchequer revenues in each of the next few years?

John Healey (Labour, Wentworth)

I have explained to the Committee that we took steps to block the avoidance scheme in the pre-Budget report. At that stage, we had recourse only to secondary legislation, which we laid. We estimate that the revenue at risk from future avoidance schemes is £165 million a year. Clause 20 puts the powers in primary legislation. That allows us to simplify them and to take away some of the burdens for non-avoidance, which we implemented because we had to use the second-best, but nevertheless immediate, instrument of secondary legislation. The

clause is a further demonstration of our commitment to tackling VAT avoidance in a well-targeted way.

Stephen O'Brien (Conservative, Eddisbury)

Clause 20 relates to the time of supply of land transactions. The Economic Secretary has explained the clause thoroughly. Basic VAT law—for the record, paragraph 1(a) of schedule 9 to the Value Added Tax Act 1994—states that the sale of a freehold new building or new civil engineering work must be standard rated, regardless of whether the seller has elected it. However, by entering into sale contracts where payment of the price was delayed, sellers of new buildings or works could take advantage of section 96(10A) of the 1994 Act and VAT regulation 84(2) in its original form, which delayed the time of supply until payment of the price and made the sale exempt. That provision has been used in VAT avoidance and was partially dealt with by a statutory instrument in November 2002, which amended VAT regulation 84(2).

By inserting new section 96(10B), clause 20 lays down a general rule that if at the date of the grant—in other words, completion—the building or the work is new, the price will always be standard rated, even if payment is delayed. Having considered the Minister's explanation carefully, I regard the clause as reasonably sensible.

Question put and agreed to.

Clause 20 ordered to stand part of the Bill.

Clause 21 - Business gifts

John Healey (Labour, Wentworth)

This is a small and simple measure, but it will be none the less welcome to many businesses and to members of the Committee. The Committee will know that firms from across the country routinely offer gifts to visitors, clients, partners and, on some occasions, visiting MPs in furtherance of their business. Such business gifts have traditionally qualified for VAT relief provided that their value does not exceed a prescribed limited and that they are given to an individual only once in a 12-month period. In Budget 2001, we increased the limit on the value of gifts qualifying for relief from £15 to £50.

There is, however, an anomaly in the rules. If a business gives a succession of gifts to the same person, the gifts are subject to VAT even if their total value over a 12-month period does not exceed the £50 limit. The clause replaces the current qualifying criteria with a provision that any number of business gifts made to the same person in a 12-month period will qualify for relief where the total cost does not exceed £50. The clause is small, simple and sensible, and I commend it to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

The Economic Secretary has said that the clause is small and simple. On delving a little further, however, we find that it raises some issues, which I hope that he will consider carefully and respond to. He will note that no amendments have been tabled because we are raising these points to catch his eye, and the eyes of his advisers. He may want to tackle the difficulties that we have identified on Report. If he chooses not to do so, we reserve the right further to consider the clause.

I will not rehearse what clause 21 is intended to achieve, and none of us would dispute its intent or principle, which the Economic Secretary has outlined. The problem is that Customs and Excise might be too rigid in examining what constitutes ''the same year''. Two annual gifts such as those given at Christmas might be given in consecutive years but within a little less than 12 months of each other. The sums may be small, but, for a small business giving a lot of Christmas gifts to clients and sales staff, the cost might be an unwelcome added burden.

I have identified a hassle factor. When one examines a provision that has been described as relatively easy and simple, it is important to consider whether true simplification has been achieved. I recognise that there is no compulsion to conduct a regulatory impact assessment, which I dare say the Economic Secretary did not consider in relation to this relatively small matter. However, the clause may well add an unnecessary and disproportionate burden to small businesses, which need to ensure that their commercial relationships and staff relationships are well cemented.

I hope that the Economic Secretary will carefully examine the idea of allowing businesses to choose a 12-month period, or to use a 12-month period determined in law, such as the VAT year, the accounting year or the period to 31 December. I also hope that he will consider bringing the matter back on Report. The problem was identified by the Institute of Chartered Accountants, which states:

''We welcome the intention to simply these rules. However, by introducing any period of one year in which a succession of business gifts can be aggregated means that businesses will have to keep rolling 12-month records, thus reducing much of the effect of the simplification. We would suggest that either businesses be permitted to choose a 12-month period, or that one should be determined by law'',

which reinforces my point.

The key is to recognise that rolling periods are worse because all companies must have them. If such records were kept, they would impact on those businesses that have already identified the ''same year''. It would be better to have a single date rather than bringing businesses into line by using a rolling period, because businesses dealing with the regulatory burden can anchor to a single date.

Rob Marris (Labour, Wolverhampton South West)

Does the hon. Gentleman agree that the calendar year would be the simplest system for everybody?

Stephen O'Brien (Conservative, Eddisbury)

At first blush, the calendar year would be the simplest system, but for administrative reasons—and therefore to reduce the regulatory burden—there may be a better way of picking the ''same year''. Personally, I would take the hon. Gentleman's suggestion, but I am raising the matter to tease out the issues. It is a Parkinson's law issue, because although the provision looks small, the hassle factor could be severe.

Another issue has been raised with me and it may have been raised with other Opposition parties. The Charities' Tax Reform Group has come up with a significant point, which I urge the Minister seriously to

consider in order to make the necessary clarification and adjustment on Report. Like all of us, charities say that simplification and clarification are desirable, but there is a problem:

''Although it was clearly not the Government's intention to target charities by introducing this measure,''

the Charities' Tax Reform Group is

''concerned that charities may inadvertently be affected by it. This is because, under Schedule 4, paragraph 5 of the 1984 VAT Act, the making of a succession of gifts by a taxpayer to the same person is a deemed supply. This can be beneficial to charities (and other not for profit organisations) in that they distribute zero-rated literature to their supporters/contacts to keep them updated on developments within the charity.

Where this activity is not a taxable supply in its own right, (eg a formal subscription to a membership organisation) the activity is a deemed supply at the zero rate. The consequence of this is an ability to recover a proportion of the VAT incurred on related costs.''

It goes on to say:

''Clause 21 would remove from the deemed supply any succession of gifts where the cost to the provider''—

that is the charity—

''of the gifts is less than £50 in any given 12-month period.''

It continues:

''As it is very unlikely that any charity will spend anything near £50 a year on newsletters for their supporters, this proposed change will prevent the charity being able to treat the activity as a deemed taxable supply. Consequently, the charity will lose the ability to recover the input tax associated with supplying the newsletter—adding yet more irrecoverable VAT to the £500 million that charities pay each year.''

It then goes on to cite at some length—I will not take up the Committee's time by putting it on the record—the technical adviser, Peter Jenkins from Ernst and Young. He has gone through the provisions in great detail. The Charities' Tax Reform Group has reasonably and responsibly said:

''If this clause goes ahead, we are concerned that Customs might not accept the technical interpretation that we outline above. We should therefore be most grateful if Ministers could confirm that it was not the intention to affect the present arrangements and that the status quo could continue for charities, ie they can continue to treat the supply of the newsletters as a deemed supply and recover a proportion of input tax on related costs.''

It goes on to say, which is why I believe it is a very constructive representation:

''Such a ministerial assurance would help clarify matters and prevent charities having to enter into detailed technical negotiations with Customs and Excise.''

I am sure that all Committee members would regard that as a sensible and appropriate approach. If any adjustment is to be made, I hope that the Economic Secretary will reflect on those points and make adjustments on Report. If that is not the case, we reserve the right to try and do the same.

Norman Lamb (Liberal Democrat, North Norfolk)

We have received the same representations from the Charities' Tax Reform Group, and we share the concerns outlined by the hon. Member for Eddisbury. It seems that a simple solution to the problem would be for the Economic Secretary to confirm that it is not the intention of the clause adversely to affect charities in the tax treatment of literature such as newsletters that they distribute to members.

Perhaps the Economic Secretary would also advise charities how they can make it clear through their own literature that people will receive the newsletter in return for donation to the charity so that the matter is given consideration. As I understand the briefing, that would take it outside the definition of a business gift. The matter could be simply clarified by the Economic Secretary making it clear that charities will not be adversely affected and the status quo will continue.

My other quick point, which was also referred to by the hon. Member for Eddisbury, is that I would be grateful if the Economic Secretary would deal with the concern that the effect of the clause could be that businesses will have to keep rolling 12-month records, which will increase the regulatory burden on them and reduce the beneficial impact of the clause.

Jonathan Djanogly (Conservative, Huntingdon)

I agree with my hon. Friend the Member for Eddisbury. It is disappointing that the Government are not taking the opportunity to simplify the situation. The rolling period will mean that the red tape that will need to be processed in order to comply with the clause will be processed at many different times. The Economic Secretary made the point that we are talking about small amounts, but regular processing of small amounts is relatively cost-inefficient. My hon. Friend made an important point that should be addressed; a fixed, 12-month period would be far simpler to administer.

John Healey (Labour, Wentworth)

In relation to representations that I have received from the Charities' Tax Reform Group, I shall examine those concerns to check whether there is an unintended impact, or any consequences for charities in the way that the hon. Members for Eddisbury and for North Norfolk (Norman Lamb) have outlined.

On the question of the 12-month period, which was raised by the hon. Members for North Norfolk, for Eddisbury and for Huntingdon, it is right that the Bill provides for a rolling 12-month period. By concession, businesses will be able to adopt any suitable 12-month period, such as a calendar or tax year, but they will be able to pick the period with the least hassle factor for them, to use the term of the hon. Member for Eddisbury. The decision is down to businesses. Businesses will then have to demonstrate that the £50 limit is not exceeded in any 12-month period.

In relation to the hon. Gentleman's first point about Christmas gifts, a company could choose to define its 12-month rolling period appropriately if it were concerned about the Christmas period and could give gifts on 25 December in one year and 24 December in the next. Therefore, they can choose both their 12-month period and when they make the gifts to staff. I believe that it is the simplest and most flexible way and best suits the needs of different businesses.

Concerns have been expressed about the possible increase in compliance costs. Any increase in record keeping is likely to be minimal. Businesses must already monitor whether they are making a series or succession of gifts and must keep records on the value

of some business gifts for the Inland Revenue. Therefore, the change merely extends record keeping minimally and should not involve a significant increase in costs. On that basis, I hope that all members of the Committee will support the clause.

Question put and agreed to.

Clause 21 ordered to stand part of the Bill.

Clause 23 - Supply of electronic services in member States: special accounting scheme

Nicholas Winterton (Conservative, Macclesfield)

The question is that clause 23 stand part of the Bill.

Mr. O'Brien rose—

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman is a little late.

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien (Conservative, Eddisbury)

I am most grateful to you, Sir Nicholas. I shall clearly have to jump out of my seat more energetically. I thought that a little eye contact would do the trick, but that is clearly not so in your case. I must remember that, as both of us come from Cheshire constituencies, I shall have to smile harder at you.

Clause 23 and schedule 2 relate to the supply of electronic services in member states and the special accounting scheme and are part of a series of changes pursuant on the EU VAT on e-commerce directive 2002/38/EC, which deals with VAT on international e-commerce. This particular change relates to the position of a non-EU business that provides interactive services over the internet to buyers in the EU, without having any place of business in the EU itself—shades of our previous debate on betting online. Up to now such a business could avoid European Union VAT on its sales. It must now register and pay VAT on sales to private customers in the EU. However, it needs to register in only one EU member state, which can be any member state that it chooses.

As we are discussing clause 23 stand part, I have taken the opportunity to lay out the introduction. The amendments relate to schedule 2, which inserts schedule 3B to the VAT Act 1994 into the Bill, and provide for a person to register in the United Kingdom. All other EU countries are meant to be introducing corresponding provisions. The schedule is interesting from a technical point of view, as the business will create output VAT.

As this is a stand part debate, I have taken the opportunity to lay out the introduction. The amendments relate to the schedule, which I understand will be taken later. Unless you immediately give me guidance, Sir Nicholas, that you would like to combine them, I shall sit down now and discuss the amendments as part of the schedule after the stand part debate. As the schedule relates to the clause, I wanted to make it clear that I had amendments, as it might affect our view on the stand part debate.

Nicholas Winterton (Conservative, Macclesfield)

May I help the hon. Gentleman? If he chooses to raise these matters now, clearly, as I previously told the Committee, I shall not want a repeat performance when we reach schedule 2. In view of the advice that I gave previously, I am happy for the hon. Gentleman to raise those matters now if he believes that that is the best way to present his case.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful, Sir Nicholas. I want to follow the correct procedure, but it would be sensible to discuss schedules with their relevant clauses. Whether that will be the theme as we discuss the Bill is for you and others to decide.

The schedule is technically interesting in that output VAT is at the UK rate on supplies to customers in the UK, but on supplies to customers elsewhere in the EU, the rate will be that in the customers' countries. Customs and Excise will collect output VAT, but pay it to another country. That seems straightforward, and it was as a result of representations from the Chartered Institute of Taxation that we tabled amendments Nos. 91 and 92 to schedule 2. I shall move them at the appropriate time, but will debate them now for the convenience of the Committee following your guidance, Sir Nicholas.

The Chartered Institute of Taxation believes that the text of paragraph 14(4) of new schedule 3B to the Value Added Tax Act 1994:

''Records must be made available electronically under sub-paragraph (3) above'',

should state:

''Records under sub-paragraph (3) above must be made available electronically.''

That may seem a minor change, but it would be helpful in clarifying and tidying up the drafting. The Committee is taking up the time of right hon. and hon. Members to try to ensure that the legislation is as good as possible, irrespective of whether we agree with it. In this case, we have no difficulties with the principles concerned.

On amendment No. 92, paragraph 22(7) of new schedule 3B to the Value Added Tax Act 1994 does not identify the UK provision giving effect to article 4(2) of the 13th directive. All Committee members will have latched on to that point and have it in the forefront of their minds. The Institute of Taxation states that it appears to be regulation 190 of the VAT regulations 1995, SI 1995/2518. That is a minor but important omission, which should be tidied up, and I simply seek the Minister's undertaking that if he is not minded to accept our amendments, he will return on Report with amendments to give proper legislative effect to them. If he cannot give such an undertaking, we shall have to register our displeasure when the amendment is moved formally.

John Healey (Labour, Wentworth)

I shall follow your guidance, Sir Nicholas, and the lead given by the hon. Member for Eddisbury. I shall briefly explain the clause, the schedule and my view on the two amendments.

The Committee may recall that last year my right hon. Friend the Chancellor successfully concluded negotiations with other European states within the

European Union on a new VAT directive for e-commerce. My right hon. Friend the Paymaster General played an important role in that agreement.

At present, e-services supplied by EU firms to non-EU customers are subject to VAT. My hon. Friend the Member for Wolverhampton, South-West (Rob Marris) is looking puzzled, so I shall repeat that for his benefit. At present, e-services supplied by EU firms to non-EU customers are subject to VAT. Those supplied by non-EU firms to EU customers are free of VAT. That anomaly, as my hon. Friend will appreciate immediately, undermines the competitiveness of UK firms and firms in other European Union states. The new agreement has at its heart a UK proposal to level the playing field between EU and non-EU businesses by introducing, by 2006, a comprehensive electronic system to enable EU consumers to be charged VAT at the rate applicable where they live and whoever the supplier may be. In the interim, non-EU businesses providing e-services will, from 1 July 2003, will be required, for the first time, to charge VAT on all the supplies that they make to EU customers. That requirement, which the hon. Member for Eddisbury touched on, would mean that non-EU businesses would be obliged to register and account for VAT in every EU member state where their customers resided. However, clause 23 and schedule 2 introduce a simplified optional scheme to allow such businesses to register electronically in a single member state of their choice and to declare electronically the European Union tax due on a single VAT return to that member state. The member state of registration will then distribute the VAT to the appropriate EU member states. As I have explained, the scheme is expected to be replaced by July 2006 by the comprehensive electronic system for both EU and non-EU businesses.

As far as I can see, amendment No. 91 would merely alter the structure of the sentence in page 149, line 26, and appears to be principally a matter of style and taste that adds nothing substantive to the clause. If our drafting is unclear or could be misconstrued, I should be prepared to make such a change, but I do not feel that the hon. Gentleman has made that clear or pressed that point hard enough for me to accept the amendment.

Amendment No. 92 seeks to add an incorrect and unnecessary cross-reference to a VAT regulation. It is incorrect because regulation 190 implements article 4(1), not article 4(2) of the 1986 VAT refund directive—which is directive 86/560, the 13th VAT directive. It is unnecessary because article 4(2), which allows member states to apply extra restrictions to non-EU businesses that they do not place on their own businesses, has not been implemented in the United Kingdom. I hope that, on that basis, the hon. Member for Eddisbury will agree not to move the amendments. If he does not, I shall have to ask my hon. Friends to resist them.

Stephen O'Brien (Conservative, Eddisbury)

In the light of the Economic Secretary's response, for which I am grateful, and in particular of his highlighting of the detail of amendment No. 92, I shall, at the appropriate moment, seek leave to withdraw that amendment.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman has not yet moved amendment No. 92. As it will be taken with amendment No. 91—with which it will be convenient to consider amendment No. 92—he will not have to withdraw it. We will come to those two amendments when we move on to schedule 2. I hope that the hon. Gentleman appreciates what I am saying and understands the very important procedures of Committee.

Stephen O'Brien (Conservative, Eddisbury)

In the light of your advice, Sir Nicholas, I shall wait until we get to the amendments. For the Committee's convenience, I was simply trying to flag up where we were coming from, but we will get to that shortly.

Question put and agreed to.

Clause 23 ordered to stand part of the Bill.

Schedule 2 - Supply of electronic services in member States: VAT special accounting scheme

Stephen O'Brien (Conservative, Eddisbury)

Were amendment No. 92 the lead amendment, I should not have moved it. The Economic Secretary said that he would look carefully to see if there is any need for a change in wording such as that proposed in amendment No. 91. Further representations may be made on that, and he will have time to consider those before Report. For that reason, I have not moved amendment No. 91.

Rob Marris (Labour, Wolverhampton South West)

I am trying to make my remarks at the right place in the batting order, which the hon. Member for Eddisbury seems to be finding difficult today. I was slightly puzzled when the Economic Secretary said that services that are supplied by companies within the EU to companies outside the EU are subject to VAT but not vice versa. I cannot see in schedule 2 that the reverse is taken into account for countries such as Canada, which has the equivalent of VAT in its goods and services tax. Will not there be double taxation under the scheme?

John Healey (Labour, Wentworth)

We have a double taxation treaty that adequately covers that situation.

Question put and agreed to.

Schedule 2 agreed to.

Clause 24 - Introductory

John Healey (Labour, Wentworth)

The clause determines the scope of civil penalties for those who fail to keep their obligations under national and EU Customs laws or who evade certain types of Customs duties or import VAT. It also defines key terms for this part of the Bill, which includes clauses through to clause 41. The date at which the changes will come into operation will be set out in a Treasury order to be laid in the autumn.

Civil penalties are being introduced to encourage businesses to comply better with their legal

obligations. They will help to create fairer competition for all importers and exporters by specifically targeting non-compliant businesses that, by cutting corners, can gain a competitive advantage over businesses that fully meet their legal obligations.

At present, most infringements of Customs laws are classified as criminal offences. Many are relatively minor and are not penalised because to do so by way of criminal prosecution would be disproportionate and a poor use of court and Customs time. Introducing civil penalties will allow a more appropriate response to many breaches of the law and will provide a necessary sanction against non-compliant businesses that have hitherto been able to ignore the rules, largely without fear of punishment.

Customs already operates similar civil regimes for domestic VAT and excise. It is difficult to come by data, but I believe that the significant data that we have from the operation of VAT give an indication of the potential effect of this set of clauses and this reform. Prior to the introduction of a civil sanction, only 68 per cent. of declarations and payments of domestic VAT were received on time. With the introduction of a default surcharge, the compliance rate immediately jumped to 77 per cent. and has continued to rise to its current level of 87 per cent.

There will be two types of penalty under the Bill. The evasion penalty will be used as an alternative to prosecution in less serious cases of evasion. However, it is not a substitute for prosecution. Businesses or individuals who evade or try to evade duties or taxes will continue to be penalised either through a civil evasion penalty or, if appropriate, through criminal prosecution. Let me make it clear that the Government are not going soft on evaders or criminals. Customs civil penalties will not apply to prohibited and restricted goods such as drugs and firearms, or goods liable to excise duty, such as cigarettes and alcohol. The current sanctions applied to those infringements will remain. The introduction of a civil evasion penalty for evasion of Customs duties will enable Customs to investigate and deal with more cases of fraud because of to the streamlined procedures that apply.

A second penalty is being introduced to deal with general non-compliance where evasion is not involved. It will be used in cases of failure to comply with legal requirements and obligations, such as a business that makes persistent errors in import declarations. The aim is to encourage compliance by those who currently fail to discharge their obligations correctly. In targeting the non-compliant, Customs will help to ensure that already compliant businesses are not placed at a commercial disadvantage by non-compliant competitors.

In developing the proposals, we have worked closely with a sub-group of the joint Customs consultative committee for well over a year. That group comprises interested parties from throughout the international trade sector, representing agents, importers, exporters, freight forwarders and representatives from the Law Society and the Confederation of British Industry. Throughout the

process, they have been supportive of the introduction of a civil penalty regime. They view the introduction of penalties as a long overdue, necessary measure to level the playing field for compliant operators and to remove the disproportionate—albeit increasingly remote—threat of prosecution for very minor contraventions of the law.

The hon. Member for Eddisbury will appreciate that the trade is naturally concerned about how the regime will operate in practice. Therefore, we have exposed drafts of the legislation and our own internal guidance to the group. We have listened to its concerns and, where appropriate, taken suggestions on board. We continue to liaise and consult on some aspects of the regime. I am committed to exposing draft secondary legislation to the trade during the summer before finalising its structure. I also propose to expose our training programme to the trade through the group to ensure that the right messages are being transmitted to our operational staff. With those comments, and the reassertion that the introduction of civil penalties as a new regime and a reform has broad support from the trade, I commend the clause to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

I thank the Minister for laying out a helpful introduction to clauses 24 to 41, which is appropriate as clause 24 is the introductory clause of part 3. That has helped to clarify several points, and it is particularly helpful to have a report on how the consultation process has been engaged.

As was described, the general background to the clause, and the others in part 3, is the wish to bring civil penalties for the evasion of Customs duties as an alternative to criminal sanctions. My party regards it as sensible to approve of a step that provides for civil penalties to increase compliance with the rules rather than leaving criminal sanctions as the only option. That sets the scene for where we are coming from in relation to clauses 24 to 41. Notwithstanding the welcome for the civil regime, the test that I have applied in preparation for the debate is how the clause shifts the burden on the taxpayer. Has the burden been shifted in such a way as to be onerous in a way that raises questions or cannot be sustained? We have tested the possible fairness or the burden of the provision.

The Institute of Chartered Accountants in England and Wales is well aware of the problems faced by Customs and Excise in the management and control of certain movements of goods, and it understands the logic behind the introduction of the provisions. It is concerned about the way in which the clauses have been drafted and about whether the proposals meet the requirements of human rights legislation. To that end, we need to explore some of the issues. I note that the frontispiece of the Bill states:

''Mr. Chancellor of the Exchequer has made the following statement under . . . the Human Rights Act 1998:

In my view the provisions of the Finance Bill are compatible with the Convention rights.''

Clearly, that is an important and serious statement. Parliament has every right to rely on it—that is how it is intended.

The institute raised the matter as a potential issue and we have focused some of our concerns on it. I hope that during the debate on this and following clauses we can establish whether the institute's concerns are genuinely well founded. The Minister might need to reflect on a number of points.

Norman Lamb (Liberal Democrat, North Norfolk)

It was pointed out to me earlier that I inadvertently addressed you incorrectly, Sir Nicholas. May I take this opportunity to apologise?

Briefly, I share the concerns raised by the hon. Member for Eddisbury. I received the same briefing from the Institute of Chartered Accountants in England and Wales. Although it seems a sensible reform to introduce the civil remedies, the institute expressed concern that the absence of due process with a civil remedy could give rise to numerous appeals, which could result in the setting aside of the penalty, thereby potentially reducing the efficacy of the civil remedies. I should be grateful if the Minister would deal in his response with the concern that the system could be clogged up because of the process of appeals, as well as with concerns about human rights. If due process is denied, a person could end up paying a penalty that is effectively criminal in its proportions, but that person would not have the protections that citizens have when faced with a criminal charge.

John Healey (Labour, Wentworth)

I am grateful to the hon. Member for Eddisbury for his general approach in saying that the reform is sensible. Both he and the hon. Member for North Norfolk raised the question, which they had been briefed on, of whether the measure conforms with human rights legislation. Our view, and the view of parliamentary counsel, is that it does. Cases of evasion through dishonesty, which are dealt with under clause 25, are classified as criminal charges under the European convention on human rights. That classification entitles the taxpayer to the safeguards provided for in article 6(2) and (3) of the convention. It does not make the case a criminal case in UK law, however, and the Police and Criminal Evidence Act 1984 does not automatically apply. The procedures to be adopted when investigating cases under clause 25 are being modelled on those used in the VAT civil evasion penalty regime, which have been found by the independent VAT and duties tribunal to be human rights compliant.

On safeguards in what it is important to remember is a civil, not a criminal regime, under our set of proposals, when liability to penalty is first established, except when over £10,000 in duty has been undeclared, action will always be confined to a warning letter advising of the contravention and informing the taxpayer that future performance will be formally monitored over two years. Should similar contraventions occur during that period, a penalty may be imposed. As a further safeguard, the decision to issue a warning letter can be appealed about to a tribunal.

I hope that members of the Committee will accept the clause.

Question put and agreed to.

Clause 24 ordered to stand part of the Bill.

Clause 25 - Penalty for evasion

Nicholas Winterton (Conservative, Macclesfield)

Before we begin the debate and further to the point of order raised by the hon. Member for Eddisbury on clauses 34 and 35 and the amendments to them, the Chair is happy for amendments Nos. 123 and 124 to be discussed with clause 34 and amendments Nos. 131, 132 and 120 to be discussed with clause 35. I hope that that meets the wishes of the Committee.

I understand through the usual channels that the Committee is likely to sit until around 7.30 pm today. If yesterday's happenings in the House are a guide, we shall probably have several Divisions on the Floor of the House on the third day of the Criminal Justice Bill. I suggest to the Committee that it might be sensible to try to combine a tea break for Committee members—and particularly for Ministers, Opposition spokesmen and the Chair, a comfort break—with a Division if one occurs around 5 o'clock and that we have a short break of, perhaps, half an hour then. I shall make an announcement at the time, but thought it might be helpful for the Committee to have some indication of that now.

Stephen O'Brien (Conservative, Eddisbury)

I acknowledge with gratitude the approach that has been taken on clauses 34 and 35 with their attendant amendments. I dare say that I speak on behalf of all Committee members in thanking you, Sir Nicholas, for giving us guidance on the rest of today's business and particularly the timing of both tea and comfort. I am grateful to you for helping the Committee.

Turning to clause 25, the concept of dishonesty in evasion is retained, although there may be a question about the burden of proof because there is no need for the conduct in question to give rise to any criminal liability. The Minister's response on clause 24, and particularly his response to the hon. Member for North Norfolk, was helpful. The argument strayed into clause 25 and the hon. Gentleman has obviously received representations, as I have, about its application in relation to human rights and, therefore, the Police and Criminal Evidence Act 1984.

The Minister set out clearly the reasons for the possibility that the 1984 Act does not automatically apply in such cases. That went some way to alleviate some of the issues that have been raised in representations to us about clause 25. As a result of this short debate, the Minister will be able to add to that. The concern was that there might be an absence of due process. We were not minded to table amendments to the clause, but I await the Minister's response, although his response to clause 24 went a long way to assist me.

Michael Jack (Conservative, Fylde)

Could the Minister put my mind at rest about the way in which clause 25 will operate for someone who unwittingly evades a requirement to pay tax when that is subsequently discovered following inspection and discussion with a representative of Customs and Excise and when they had not knowingly

set out to be dishonest? For those of us who have to deal with constituency cases in which constituents with small businesses run into problems over VAT, some words of reassurance would be helpful. Perhaps that is dealt with through the type of procedure that he described in clause 24, where letters of notice and warning are issued, but I should be grateful for some clarification.

Stephen O'Brien (Conservative, Eddisbury)

My right hon. Friend raises an interesting point. I hope that the Economic Secretary will confirm that the concept of dishonesty is retained in the clause. There should have to be an element of intent combined with some knowledge.

Michael Jack (Conservative, Fylde)

I entirely agree with my hon. Friend's line of inquiry. We look forward to hearing what the Economic Secretary has to say.

John Healey (Labour, Wentworth)

The hon. Member for Eddisbury probed the burden of proof, which is an appropriate and important line of questioning because we are looking to introduce a civil rather than a criminal regime. As he knows, comparing the two regimes, criminal cases must always be proved beyond all reasonable doubt whereas civil cases require proof to a lower level, known as the balance of probabilities. Although that is a lower level than proof beyond reasonable doubt, the more serious the allegation, the higher the level of proof must be. Thus, for civil evasion cases the level of proof required by the courts and VAT tribunals begins to approach the criminal standard, although it is still below it, whereas the level of proof required to demonstrate liability for default surcharge, for example, is lower.

The right hon. Member for Fylde is rightly concerned about the position of businesses that trade honestly and make unwitting errors, as he described them. The Government recognise that even the best-run businesses make occasional mistakes, and penalties will not automatically be issued in such cases. In addition, the new penalties are part of a much wider programme that Customs is putting in place to ensure that the changes are implemented smoothly and to improve compliance across the board. Those include a visiting programme to provide advice and support for new traders who wish to improve their general compliance; improvements in the way in which existing guidance is updated and made available; and the publication of compliance standards. Those standards will be published through the joint consultative committee, a body made up of a wide range of trade and other interests with a direct concern in this field, as I explained earlier.

On that basis, I hope that all Committee members will accept the clause.

Question put and agreed to.

Clause 25 ordered to stand part of the Bill.

Clause 26 - Penalty for contravention of relevant rule

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 125, in

clause 26, page 22, line 3, leave out subsection (3)

The amendment is linked to clause 25, which introduces civil penalties for evasion of import and export duties. Clause 26 contains a compliance rule, which carries a penalty for transgressions—subject to the concept of a reasonable excuse, which is a limited concept in VAT terms—and for the breach of certain rules and requirements in circumstances other than evasion.

My approach to clause 26 is twofold. First, I seek clarification of the part to which the amendment does not relate. I suspect that we will therefore find ourselves having a stand part debate and I hope that that is what you will rule, Sir Nicholas, for the convenience of the Committee. My point, which comes from the Institute of Chartered Accountants in England and Wales, is that although the maximum penalty for contravention is £2,500, it is not clear whether that is an absolute penalty for a given series of breaches or the maximum that could apply to each breach. If 20 invoices covered the import of a consignment of the same goods, all destined for different customers, and there was a common breach, would the fine be £2,500 or £50,000?

If the maximum fine was limited to £2,500, that would not be a criminal matter. On the other hand, if the fine was £50,000, any enforcement procedures would have to follow the Police and Criminal Evidence Act 1984. Given the answers that the Economic Secretary has already given on this part, and his reference to the position under article 6(2) of the European convention on human rights, a question arises of whether PACE would apply. The example used to express the ICAEW's concern might be debateable, but the fundamental point about the maximum fine is important and we seek clarification.

My second point relates to the amendment. The problem that I have identified and highlighted through it centres on the understanding of the phrase ''without further qualification'' in subsection (3). Does it mean that Customs and Excise does not have to give reasons for designating someone a prescribed person? If so, it might be difficult for the person concerned to argue against the designation. My recommended solution to the problem is simply to delete subsection (3). We believe that it is wrong for Customs to be able to name any person under that rule—a point that can be generally understood in terms of the fair and appropriate balance of justice. Instead, Customs should be required to show that an individual falls within a designated category.

Under the current provision, a person could have no knowledge of why they were being designated a prescribed person, and no redress. We regard that as a penalty and it is of concern to all our constituents who potentially could be in that situation. Customs and Excise is being given too wide a power. The power proposed by the Government in the clause could ultimately allow Customs to prevent someone from arguing whether they should be a prescribed person, because it could simply include them by name without giving an explanation or reason.

I hope that the Economic Secretary will consider the matter in the serious way in which it has been put, and that he will accept the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

Subsection (3) is an enabling power. I though that the outline given in subsection (1) would be sufficient, but I then had a closer look at the wording. In the definitions, ''prescribed'' is defined as meaning specified in or determined in accordance with the regulations made by the Treasury. That leads me to ask the Economic Secretary a few questions.

When the definition refers to the regulations made by the Treasury, does that mean that the Treasury must bring those regulations to the House for approval, or can it make them up as it goes along? Is subsection (3) intended to get around the need to bring regulations to the House by allowing the Treasury to do what it wants, even if it must bring regulations to the House on other occasions? The provisions seem to be circular and I wonder whether subsection (3) is a way of getting round subsection (1).

John Baron (Conservative, Billericay)

I, too, have one or two concerns about the clause's infringement of civil liberties. Clauses 25 and 26 will make it easier for Customs and Excise to take action against individuals evading customs duties or import VAT. The introduction of civil penalties will bring the customs regime into line with other regimes administered by Her Majesty's Customs and Excise such as VAT, where civil penalties have been used to improve compliance. In general, it seems sensible to approve of a step that provides for civil penalties to increase compliance with the rules rather than to leave criminal sanctions as the only option. In that respect, the Government's move is welcome. However, I have one or two concerns and I would appreciate it if the Economic Secretary were to address them.

I seek an assurance that the move to civil penalties will not be detrimental to an individual's civil liberties. For example, my hon. Friend the Member for Eddisbury has already mentioned the important phrase ''without further qualification''. It means that Customs and Excise does not have to give reasons for designating someone a ''prescribed person'', which has all sorts of ramifications. Under the current provisions, a person could have no knowledge of why they were being designated as such and would therefore have no redress.

The amendment is designed to prevent Customs and Excise imposing a penalty simply by naming any person as falling within the description ''liable to a penalty''. That is important, because the power could prevent someone from arguing that they should not be included, because Customs and Excise could include them by name without giving an explanation or a reason. That point should concern the Committee and I should like to hear the Economic Secretary's views.

The burden of proof in evasion cases falls on the individual, who must prove that they have not been avoiding paying their liabilities—a point on which we have already touched. Clause 26 introduces civil penalties for a breach of certain rules and requirements in circumstances other than evasion such as negligence. Would it not be better if the Government had to prove that an individual is guilty of evasion? For example, an innocent trucker could make an administrative error through negligence or oversight and find himself automatically liable to civil penalties at the discretion of Customs and Excise. The

burden of proof and the right to redress particularly concern me, and I look forward to the Economic Secretary addressing those issues when he sums up.

John Healey (Labour, Wentworth)

Civil penalties are being introduced to encourage businesses to comply with their legal obligations. Where businesses are suspected of evading duties, the law will provide Customs and Excise with an alternative to prosecution—the imposition of a civil evasion penalty.

There will be two types of penalty. The evasion penalty established in clause 25, with which we have just dealt, will be used as an alternative to prosecution in less serious cases of evasion. It is not a substitute for prosecution, and businesses or individuals that evade or try to evade duties or taxes will continue to be penalised either through a civil evasion penalty or, where appropriate, criminal prosecution.

The other penalty, which is set out in clause 26, will deal with general non-compliance where evasion is not involved. It will be used in cases of failure to comply with legal requirements and obligations—for example, a business that makes persistent errors on import declarations. It will also be used to deal with the small number of businesses that fail to comply fully with legal requirements and obligations in seeking to gain a competitive advantage over other businesses; and to encourage those businesses that persistently make mistakes to improve their performance. It will not be used to punish occasional, minor errors.

The maximum penalty for a contravention not involving evasion through dishonesty will be £2,500.

John Baron (Conservative, Billericay)

The Minister states that the power will not be used to punish minor indiscretions. Who will make that decision, how will it be made and does the Bill contain guidance, because ''minor errors'' is a subjective term?

John Healey (Labour, Wentworth)

I used the phrase in an attempt to underline the fact that the process is proportionate to persistent non-compliance, and the penalties in clause 26 are similarly proportionate. I am not trying specifically to define what ''minor'' will mean in this instance.

Initial contraventions—I hope that this will reassure the hon. Member for Eddisbury—will be dealt with by issuing a warning letter. Members of the Committee would regard that process as a sensible, proportionate first response from Customs and Excise, although I intend to review the policy when the regime has operated for about 18 months.

Michael Jack (Conservative, Fylde)

I am grateful to the Economic Secretary for giving way and for his assurance that he will keep the matter under review. I seek an assurance from him that he will publish a commentary in his annual report on Customs and Excise on how the penalty regime is operating to allow everyone to gain an annual overview of how the regime operates, its effectiveness and any questions that have been raised.

John Healey (Labour, Wentworth)

In monitoring and reviewing the regime, Customs and Excise and I, as the Minister

responsible, will provide the degree of disclosure for which the right hon. Gentleman is looking. I am perfectly prepared to give an undertaking that an assessment of the operation of the regime in its first 18 months will be published. I cannot tell him for certain that the annual report will be the appropriate time or place to do so, but I hope that he accepts and appreciates the general commitment and principle.

I shall explain how the scheme is likely to operate to reassure hon. Members. After the initial warning letter, similar contraventions will begin to attract penalties. The penalties will usually be stepped and will be imposed at a low level to begin with. Should the first penalty fail to deter or to encourage better compliance, the business concerned will attract further penalties if it does not improve its record. The penalties can rise to a maximum of £2,500.

Norman Lamb (Liberal Democrat, North Norfolk)

The Economic Secretary may be about to deal with this point. He referred to the maximum fine of £2,500. In its submission, the Institute of Chartered Accountants in England and Wales raised this question: if there were a common breach in 20 invoices covering the import of a consignment of the same goods, all destined for different customers, would the fine be £2,500 or £50,000? Perhaps the hon. Gentleman would deal specifically with that question.

John Healey (Labour, Wentworth)

Specifically, the maximum fine in such circumstances would be £2,500. In a situation such as that put to me by the hon. Member for Eddisbury, in which Customs discovers a series of identical contraventions—that is also the point of the hon. Member for North Norfolk—Customs will treat the contraventions as a single event and, if appropriate, issue a single penalty which may be up to the maximum of £2,500 as set out in the clause. I hope that that settles hon. Members' concerns.

The hon. Member for Billericay asked about the burden of proof. It will be for Customs to prove that on the balance of probability, which is the standard of proof that we discussed earlier, a liability to a penalty exists.

On amendment No. 125, I say to the hon. Member for Eddisbury that by deleting clause 26(3) he would jeopardise the ability of Customs to ensure that the person who is responsible for the contravention is penalised. I hope that by briefly explaining the purpose of the clause I can set his mind and that of the hon. Member for Billericay at rest. Clause 26 provides for penalties for contraventions of relevant rules. In most cases, national and European Union Customs law specifies in the relevant rules the person who is responsible for compliance; for instance, the importer or the warehouse keeper. However, in some cases, the law is less specific and contravention may be committed by any person. Clause 26(1) provides the power to impose a penalty on a person of a prescribed description. Clause 26(3) ensures that, if appropriate, the description may include any person.

For the reassurance of members of the Committee, clause 26(3) does not and cannot extend liability for a penalty to anyone who is not responsible in law for meeting a relevant obligation or requirement. I hope

that with that explanation Opposition Members will withdraw the amendment. If they do not, I ask my hon. Friends to resist it.

Stephen O'Brien (Conservative, Eddisbury)

I pay tribute to the Economic Secretary for having dealt with the clause and the issues raised by it with care. I found the argument that my hon. Friend the Member for Huntingdon presented in his interesting and proper probing amendment intriguing, but the Economic Secretary demonstrated that there is a difference in the interplay between subsections (1) and (3). I also welcomed the support and the arguments of my hon. Friend the Member for Billericay.

The Economic Secretary mentioned a warning letter, a stepped approach to penalties and a maximum penalty of £2,500. In parenthesis, I wish to note that anyone who has ever been caught speeding in their car by two cameras in succession would welcome his approach to penalties. I have often wondered whether I will be guilty of such an offence, but I have not yet succumbed.

John Healey (Labour, Wentworth)

Is the hon. Gentleman suggesting that Customs should take on responsibility for the operation of traffic Acts?

Stephen O'Brien (Conservative, Eddisbury)

On the contrary. Like all things, it takes time to prove one's worth. In any event, I understand that the Attorney-General has overall supervision of the prosecution affairs of Customs and Excise from recent times.

I listened carefully to the way that the Economic Secretary explained the interaction of subsections of clause 26. Therefore, in view of the undertaking that he gave my right hon. Friend the Member for Fylde that the matter would be kept under constant review, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Chairman, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That the clause stand part of the Bill.

Question agreed to.

Clause 26 ordered to stand part of the Bill.

Clause 27 ordered to stand part of the Bill.

Clause 28 - Exceptions from section 26

Stephen O'Brien (Conservative, Eddisbury)

The clause enables Customs to switch from a company to a director a VAT liability arising from a VAT evasion, if it appears to it that the liability arose from the director's dishonesty. The Institute of Direct Taxation says that, although clauses 33 to 36 gave the VAT tribunal the right of appeal, it is for the director to prove that Customs is wrong, not for Customs to prove otherwise. Customs must prove that there was evasion by the company, but not that the director was personally dishonest. The institute asks why, as this appears to be a criminal penalty under

human rights law, Customs should not also have to prove that the director has acted dishonestly.

I have put on the record the representation that has been made to me. We have not chosen to encompass the argument in an amendment. I look forward to the Minister's response.

John Healey (Labour, Wentworth)

As the hon. Gentleman has made clear, the clause provides for a civil evasion penalty to be levied against a director or other relevant officer of a body corporate liable for a penalty, when the conduct giving rise to the penalty is attributable to that individual's dishonesty. I should tell the hon. Gentleman and the Institute of Indirect Taxation that the proof rests with Customs, not with the director.

Allowing penalties to be assessed against dishonest directors or officers of a company ensures that those who benefit personally from an evasion for which they are directly responsible can be targeted. The provision mirrors arrangements that are already applied successfully in the VAT civil evasion penalty regime. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 28 ordered to stand part of the Bill.

Clause 29 - Reduction of penalty under section 25 or 26

Stephen O'Brien (Conservative, Eddisbury)

Again, a representation has been made to us to make sure that this matter is put on the record, so that there is no question of it not being properly considered as part of our scrutiny. The Institute of Chartered Accountants of England and Wales recognised that the clause is intended to replicate section 70(4) of the VAT Act 1994 in respect of clauses 25 and 26. It is seriously concerned that, where penalties are considered to be of a criminal level, subsection (3)(c) would deny taxpayers a defence that goes to the heart of the motive test.

A penalty under the clause is relievable on the ground that the taxpayer had a reasonable excuse, but if the taxpayer is precluded from arguing that they acted in good faith, that sabotages any possible argument that they had a reasonable excuse. The denial of this defence, moreover, allows for a challenge on the ground of the infringement of human rights legislation and therefore weakens the clause. The ICAEW goes on to say that that comment would apply equally to any existing section 70 provisions that are applicable to penalties of a criminal level.

I raise the point on the same basis as on the previous clause.

John Healey (Labour, Wentworth)

The clause permits mitigating circumstances to be taken into account so that a civil penalty can be reduced. At the same time, it sets out the circumstances in which a reduction cannot be considered. Mitigation of a penalty amount will be appropriate in many cases. For example, where a business or an individual actively assists Customs and Excise to establish the extent of the arrears, thereby saving officials time, that assistance will be recognised

by a reduction in the amount of penalty assessed. As we draw comparisons to the VAT civil evasion regime that is already in place, it may be of interest to the Committee that the average penalty applied in cases of VAT civil evasion is currently just over 40 per cent. of the tax evaded. That figure shows the reduction in penalty that many taxpayers earn through co-operation with Customs and Excise investigations.

The hon. Member for Eddisbury asked why a person who acts in good faith might be precluded from being taken into account by Customs or a tribunal in considering whether a penalty can be reduced under clause 29. I will try to clarify the situation in the following way. When a person is liable to a penalty under clause 25 for evasion through dishonesty, there can be no question that he acted in good faith. In contrast, there is a general recognition that taxpayers have acted in good faith where dishonesty is not an issue. That has been recognised in setting the maximum penalty in clause 26 at a figure well below the maximum provided in clause 25, and in the decision to step the non-evasion penalty. Allowing further mitigation for good faith would in effect give the taxpayer dual relief. Decisions about whether to reduce a penalty, and if so, by how much, will initially lie with Customs, but its decisions are appealable to the independent VAT duties tribunal. On that basis, I hope that the Committee will support the clause.

Question put and agreed to.

Clause 29 ordered to stand part of the Bill.

Clause 30 - Demands for penalties

John Healey (Labour, Wentworth)

Briefly, and for the record, the clause sets out the procedures by which a demand notice for a penalty will be issued by Customs and Excise. The issue of such a notice is an appealable matter to the independent VAT and duties tribunal. The clause also provides that amounts demanded as penalties are recoverable as though they are Customs duties. That mirrors the arrangements adopted in other civil penalty regimes. I commend the clause to the Committee.

Stephen O'Brien (Conservative, Eddisbury)

I just wish to say that that is noted and accepted.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.

Clause 31 - Time limits for demands for penalties

Stephen O'Brien (Conservative, Eddisbury)

The clause specifies the time limits for issuing civil penalty demand notices. Although the principle of having such a clause is not disputed in relation to the technical process of the Bill, there is a

problem. The determination of the start date for calculating time limits for the raising of assessments or, as in the instant case, demand notices gives rise to considerable litigation and expense. It is our duty to seek to avoid that consequence flowing from statutory provisions as best we can. The method of calculating the start date for the time limits should be defined more closely to create some certainty for taxpayers. That is a principle that we seek to push forward throughout the consideration of the Bill.

The problem arises in a number of existing areas of tax legislation, and it is disappointing that in introducing a new civil penalty regime, no attempt has been made by the Treasury or Customs and Excise to address the issue. Continued reliance on case law is unattractive as it discriminates against small businesses that may not have ready access to the case law in question. I am well aware that many Committee members are concerned that small businesses do not find themselves with an added cost burden or discriminated against. There are a number of potential solutions to the problem that could be based on the principles surrounding case law, or perhaps by linking the start dates to the start of the financial year, thus requiring Customs to show only that the relevant conduct had been conducted at some stage during the financial year.

The aim of any principles adopted should be to reduce the need to argue about the specific dates on which conduct ceased, although consultation would be required to ensure a fair balance on the time given to Customs to pursue such matters. I have deliberately not proposed an amendment on the basis that the matter would benefit enormously from the Economic Secretary and the Government giving it further consideration, and taking consultation with business and advisors further. We look forward to what he has to say, but if it does not satisfy us the matter may resurface on Report.

Michael Jack (Conservative, Fylde)

When the Minister responds to my hon. Friend's observations, I should be grateful if he would expand on the reason for choosing a time limit of 20 years in clause 31(1)(a). It states that a demand notice may not be given

''in the case of a penalty under section 25, more than 20 years after the conduct giving rise to the liability to the penalty ceased.''

That is a long time, and I should like to know why that period was selected and on what basis it was determined to be the right period. I am aware that, over time, application of the Statute of Limitations to Customs and Excise matters has changed, particularly concerning repayments. Instead of going back six years, Customs and Excise has an arrangement to go back three years for repayment of certain moneys. That is reflected, oddly, in subsection (1)(b). I am always interested to know why certain periods are chosen and the thinking behind them. I should be grateful for a full explanation from the Minister.

John Healey (Labour, Wentworth)

The clause sets out time limits for the issue of demand notices. The provisions are designed to protect the interests of those incurring penalties by ensuring that the threat of the penalty cannot hang over them indefinitely.

In response to the right hon. Member for Fylde, the time limits in the clause simply mirror those applying to the VAT civil penalties regime, which already exists and operates effectively.

In response to the hon. Member for Eddisbury, if there are problems with the time limits, I would expect them to be exposed during the operation of the new regime and to be identified in the review which we intend to undertake after about 18 months of its operation.

Michael Jack (Conservative, Fylde)

May I ask the Minister how that would operate in the case of a company that might, for example, be fraudulently avoiding its obligations under VAT legislation which then, perhaps after three or four years, goes into liquidation? It would automatically go out of business and cease to be a legal entity. The 20-year timescale could give rise to the possibility that people might contrive to avoid their obligations through such artificial constructs. If so, what will happen?

John Healey (Labour, Wentworth)

I am conscious of the time and, if the right hon. Gentleman will allow me to, I will consider the matter further and write to him.

Question put and agreed to.

Clause 31 ordered to stand part of the Bill.

Clause 32 ordered to stand part of the Bill.

Clause 33 - Right to review of certain decisions

John Healey (Labour, Wentworth)

The clause requires the commissioners to review any decision that there has been a breach of a legal obligation when the relevant business or individual so requests. That is an important provision.

For contraventions not involving evasion, the commissioners may decide not to assess a penalty, but may inform the business or individual concerned that future performance will be formally monitored for a specified period. The clause gives the business or individual the right to challenge the commissioners' contention that a contravention has occurred and, therefore, to challenge the decision formally to monitor performance. The right to require reconsideration by the commissioners also applies to any demand notice issued in respect of any liability to penalties under clauses 25 and 26.

Stephen O'Brien (Conservative, Eddisbury)

I should put on the record that we are content with the Minister's explanation.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.

Nicholas Winterton (Conservative, Macclesfield)

I remind the Committee that I understand through the usual channels that it has been agreed that we should sit until around 7.30 pm. I suggest that I call a tea break at or about 5 pm, when a Division will take place. I hope that that is convenient. The Chair always seeks to be as helpful to the Committee as possible.

It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Two o'clock.

[Part I]

(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)

Nicholas Winterton (Conservative, Macclesfield)

If hon. Members want to take jackets or cardigans off, they are free to do so, as I indicated earlier.Clause 34 Time limit and right to further review

Clause 34 - Time limit and right to further review

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 123, in

clause 34, page 26, line 23, leave out 'given' and insert 'issued by the taxpayer'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 124, in

clause 34, page 26, line 26, leave out 'given' and insert 'issued by the Commissioners.'.

Stephen O'Brien (Conservative, Eddisbury)

Welcome back from the comfort break, as you would describe it, Sir Nicholas.

We are discussing import and export civil penalties. The clause sets down the time limit for requesting a review by Her Majesty's Customs and Excise of decisions when it is contended that a breach of a Customs requirement has taken place. Cutting straight to the chase, rather than describing the provision in great detail, the problem as we see it, and the reason for the amendments, is that the time limit is based on the time at which ''relevant notice is given''. In the interests of clarity, particularly for small businesses, which are uppermost in my mind, it would be helpful to have the phrase ''relevant notice . . . given'' defined, so that all parties know whether it refers to the date when the notice is prepared, the date when it is issued, or the date when it is received by the taxpayer.

The solution to the problem, as contained in the amendments, is that the time limit for an appeal should run from the date that the notice is issued, which should be on the notice itself. The time limit for a reply should run to the date on which the taxpayer issues a reply. The Economic Secretary might say that the argument against that is that, although basing a time limit for appeal on the time that the notice is received by the taxpayer is helpful to the taxpayer, it is likely to cause additional debate and argument, and that would not aid the simplification that is sought. The provision is a prime example of where we should hesitate and consider the balance to be struck between the taxing authorities and the citizens of this country—the taxpayers. When provisions are finely balanced, we should always err on the side of the taxpayer, who

often will not have the same resources to be able to contend with the public authorities.

I do not want to water down anti-avoidance measures. I repeat that we are all on the side of anti-avoidance. However, simply because something is cloaked with the term ''anti-avoidance'' we cannot defer, or ignore, the normal rights and balances that should be uppermost in the minds of all hon. Members.

Amendments Nos. 123 and 124 would put into effect the recommended solution to this serious and important matter that I have outlined. The solution is wholly consistent with the normal approach that we would expect to apply in relations between the potentially over-mighty state and the citizen taxpayer of this country. With those comments, I hope that the amendment will find favour with the Minister.

John Healey (Labour, Wentworth)

Clause 33 provides the taxpayer with the right to require Customs to review its decision that a taxpayer is liable for a civil penalty, whether or not a penalty has actually been imposed. Clause 34 sets time limits in which a person requiring a review under clause 33 must notify Customs. It also provides the right to require a decision to be reviewed a second or subsequent time, but only when new facts or matters are presented.

Amendments Nos. 123 and 124, which the hon. Member for Eddisbury (Mr. O'Brien) has tabled, are clearly aimed at clarification, as he said. I contend that they are unnecessary and in some ways unhelpful. If accepted, they would provide the opportunity for potential abuse of the time limits by the taxpayer and Customs. The amendments rightly identify ''given'' as a key word in clause 34(1) and (2). In both subsections, that can rightly be interpreted as meaning that the notice referred to must be both issued and received. However, the amendments provide only for the issue of a notice, in one case by the taxpayer and in the other by Customs.

The hon. Gentleman is seeking clarity, so I shall try to be clear for the record. We shall resist amendment No. 123 because it would give unscrupulous taxpayers the opportunity to claim that they had missed deadlines about which they knew nothing. Amendment No. 124 would give Customs the opportunity to put the taxpayer in the same, unfair position. The use of the word ''given'', with its meaning of the notice being both issued and received, offers the necessary protection to both parties: the taxpayer in clause 34(2) and Customs in 34(1).

Jonathan Djanogly (Conservative, Huntingdon)

If that is the case, why could the Bill not say ''issued and received'' to give the clarity that the Government intend to apply, rather than have the current wording, which does not seem to say either?

John Healey (Labour, Wentworth)

I believe that the formulation has sufficient certainty and clarity. We are essentially following established precedent, as I shall explain in a moment.

Accepting the amendments would create practical difficulties, frustrating the proper process of the provision. If amendment No. 123 were accepted, a taxpayer could claim that a notice requiring a review had been issued, and could complain that no review had taken place or leave Customs with an impossibly short time in which to conduct a proper review. Conversely, adopting the wording in amendment No. 124 could disadvantage a taxpayer who had not received the notice containing the original decision, in the event of non-receipt because the time period had expired before he became aware of the disputed decision, or in the event of late receipt because he was left insufficient time in which to marshal his arguments against the decision.

In passing, I draw the Committee's attention to clause 34(4), which makes it clear that Customs will be able to review its decisions in appropriate cases in which the taxpayer has not given it a notice requiring such a review within the time limit set down. The facts of each case will determine whether Customs exercises that option. It may take into account such factors as postal delays, computer breakdown and illness of key personnel. The regime is comparable to the excise regime, in which the same deadlines and arrangements as those in clause 34 apply.

The taxpayer must give a notice to Customs if they require a review, and must do so within 45 days of receiving notice of the disputed decision.

I accept that the amendments are well intentioned, but they are unnecessary and, to a degree, unhelpful, as the wording in the clause already achieves the effect that he desires. I hope that, in the light of my comments, he will seek leave to withdraw the amendment.

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Economic Secretary and I take his arguments at face value and in good faith. The difficulty remains that I am as yet unclear whether the phrase ''relevant notice is given'' replicates standard practice across all the relevant legislation relating to taxpayers. It is incumbent on us to ensure that, even though many of the clauses are dealt with by high-powered professionals who advise various clients, legislation should be usable by small businesses without advice. That is certainly part of the tax rewrite project approach, and it has been confirmed that the Government have attempted to style the clause in that manner.

In the colloquial way in which it is used, most people regard the phrase ''when notice is given'' as notice that has emanated from the person giving it. It does not necessarily mean that it is ''received'', although I can understand how the Economic Secretary sought to argue that point. Therefore, ''issued and received'' would have been a good way of dealing with the problem, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) mentioned. If our amendments were adopted, ''issued'' would cover the point on both sides of the equation. The simple way to deal with such matters is to make sure that a notice is sent by recorded delivery, so that a person knows that it has been received. That seems to be a practical solution. As I have not been satisfied by the Minister's response, I wish to press the amendment.

Question put, That the amendment be made:—

The Committee divided: Ayes 8, Noes 16.

Clause 35 - Powers of Commissioners on a review

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 131, in

clause 35, page 27, line 13, leave out 'confirmed the decision' and insert

'varied the decision as requested by the applicant'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 132, in

clause 35, page 27, line 15, leave out from 'which' to end of line 18 and insert—

'—

(a) the notice requiring a review issued by the person or his representative in accordance with section 33 is received by the Commissioners, or

(b) the review is agreed to by the Commissioners as mentioned in section 34(4).'.

Amendment No. 120, in

clause 36, page 27, line 25, leave out

'(including any confirmation under section 35(4))'.

Stephen O'Brien (Conservative, Eddisbury)

Given the arguments that relate to clauses 35 and 36, I am grateful, Sir Nicholas, that you have adjusted the order in which we consider the amendments. The arguments are slightly different from those that we have just considered on clause 34, the result of which was disappointing. I shall not have to repeat my arguments on clause 35 when we discuss clause 36.

Clause 35 sets out the powers of the commissioners and the time limit for giving notice of their determination on a review. I shall briefly outline the problem as I see it. Subsection (4) provides that if the commissioners do not give notice of their review decision within 45 days, it shall be taken that they have confirmed their decision. That means that any inactivity on the part of the commissioners, for whatever reason, prejudices the position of the taxpayer in that one avenue of appeal is removed. A powerful argument has been made not just by Opposition Members but by others who have been advising us that the provision is unacceptable, given the relative resources of commissioners and small businesses. That is very much in line with arguments that have been made earlier.

The solution for clause 35 can be found in amendments Nos. 131 and 132 and for clause 36 in amendment No. 120. The recommendation is to consider how the burden might be reversed so that the commissioners are required to notify the taxpayer of their decision within 45 days. If they do not, it should be assumed that the commissioners have varied the decision in the applicant's favour.

To protect against situations in which taxpayers do not ensure that the commissioners receive notification promptly, it would be appropriate for the time limit of 45 days to reply to run from the date of receipt of notification by the commissioners, which can easily be established.

John Burnett (Liberal Democrat, Torridge and West Devon)

Is the hon. Gentleman as concerned about the clause as I am? It is as though the Executive were trying to usurp the function of the judiciary. Is not this a preposterous clause?

Stephen O'Brien (Conservative, Eddisbury)

The hon. Gentleman may have detected a theme in the criticisms and observations that we have consistently made. We have been trying to establish the standard that accords with natural expectations and established precedents of justice in this country, while at the same time fully recognising that the Government, whether they have a large or small majority, are entitled to levy and to receive revenue that is due to them under the law, and to ensure that that is done efficiently.

The citizens of this country—our constituents—deserve our protection. I hope that the hon. Gentleman recognises that our approach in scrutinising the legislation has consistently been to consider very carefully the rights, checks and balances that must exist, particularly for statutory enforcement. He mentioned the potential for the Executive to usurp the judiciary, which in the world out there could sound a little like part of a constitutional law course. None the less, the question is absolutely key to the principles that we rightly are expected to adopt and adhere to when we consider legislation.

I am grateful to the hon. Gentleman, who helps to pinpoint our deep anxieties and concerns about many enforcement aspects of the Bill. That said, the Economic Secretary is putting up a consistent line of defence against the argument, and is making it clear that the Government need more draconian powers than have hitherto applied. That can be discussed again on Report, when we will consider the totality of what has taken place.

As we go through the Bill clause by clause, it is important that we consider carefully the merits of the case for each clause. The points made earlier will no doubt be hotly debated on Report, unless the Government see their way to accommodating some of the concerns that have been highlighted. Amendments Nos. 131 and 132 consistently apply that set of principles and do not damage the potential for revenue.

We are considering amendment No. 120, which relates to clause 36, for the convenience of the Committee at this time, and it will no doubt be formally moved at some point. I shall pray in aid the arguments I have used for amendments Nos. 131 and 132 in debating amendment No. 120, which is a reference to a deletion. I hope that with those arguments the Economic Secretary will see fit to accommodate the genuine anxieties and concerns and recognise that the matter is part of the balance to be struck between the potential prosecuting and adjudication authorities in Customs and Excise and the rights of the taxpayer.

Nicholas Winterton (Conservative, Macclesfield)

Order. Before I call the Economic Secretary, I should tell the hon. Gentleman who leads for the Opposition on these amendments that amendment No. 120 is being taken with this group and will not need to be moved. If the hon. Gentleman wants a separate Division on that amendment, the Chair will give it some consideration, but the only amendment that is usually pressed to a Division is the lead amendment, which in this case is amendment No. 131. That is what happens unless I receive a special request that the Opposition want to push a particular amendment, which is not the lead amendment, to a Division.

Stephen O'Brien (Conservative, Eddisbury)

For the convenience of the Committee, as the amendments all relate to the same point and argument, I shall be content to seek a vote only on the lead amendment if the Economic Secretary's reply does not satisfy us—which I hope will not be the case.

Nicholas Winterton (Conservative, Macclesfield)

The Committee is grateful to the hon. Gentleman.

John Healey (Labour, Wentworth)

I sincerely hope that I can satisfy the hon. Gentleman and his hon. Friends, and the hon. Member for Torridge and West Devon (Mr. Burnett), on that point.

On amendment No. 131, clause 35 sets out what Customs may do following a review of a decision that a taxpayer is liable to a penalty or a review of the amount of any penalty. It also provides that a review decision should be communicated to the taxpayer within 45 days of a request to review being received. If that is not done, subsection (4) ensures that the taxpayer may assume that the original decision has been confirmed.

For the benefit of the hon. Member for Torridge and West Devon and to reassure the hon. Member for Eddisbury that the powers are not draconian, I can explain the purpose of the provision. Subsection (4) ensures that, when unavoidable delays occur, taxpayers have some certainty and can, should they choose, lodge a formal appeal with the independent VAT and duties tribunal. In other words, that is not a draconian power, but a practical provision. It makes no presumption about and does not prejudice any subsequent consideration by the tribunal, and it is not, as the hon. Member for Eddisbury claimed, a case of the Executive usurping the function of the judiciary, because the confirmed decision of the commissioners is then subject to appeal before the tribunal.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does the Economic Secretary accept that subsection (4) demeans the commissioners? I am concerned that it may do so. There will be occasions when they may legitimately want more time. A sole commissioner may be sitting and he may be ill before he can write his judgment or come to an opinion on the matter. Has the Economic Secretary considered that?

John Healey (Labour, Wentworth)

Yes, but the balance of judgment in this case is to provide certainty for the business that could be challenged, so that, whatever the response of Customs, and especially if, for whatever reason, there is an unavoidable delay of more than 45 days, the trader knows that it can, should it choose to do so, take the case to the tribunal without further delay.

Rob Marris (Labour, Wolverhampton South West)

Perhaps the Economic Secretary and other hon. Members are aware that a similar provision has existed in planning law for many years. When somebody lodges an application for planning permission and the local authority fails to make a decision within six weeks, that becomes a deemed refusal and provides certainty. The person who made the application can then, if they wish, appeal that deemed refusal or give the local authority more time. Is that not a parallel with this power?

John Healey (Labour, Wentworth)

That was a helpful intervention from my hon. Friend. He draws an interesting parallel. The provisions that we are proposing to put in place for the new civil penalties regime are already in place for the excise regime. Therefore, there is nothing new in the ground that we are establishing in this clause.

Jonathan Djanogly (Conservative, Huntingdon)

Generally speaking, I would not rush to planning law to look for best practice.

The Economic Secretary mentioned certainty, but I do not believe that there is certainty in this provision. It is all very well to say that the commissioners can be appealed, but that does not give certainty to the taxpayer, who will have costs on the appeal and will want to make sure that the decision is taken at the time. If the amendment is not accepted, the commissioners could decide not to review the cases in hand; they could simply ignore the cases coming to them.

John Healey (Labour, Wentworth)

We included this provision precisely because we wanted to ensure that any challenges to the decisions of Customs and Excise are dealt with in a timely way and, if necessary, independently of the VAT and duties tribunal. Without it, there may be an indeterminate period before a trader gets the commissioners' judgment after an application for review. I hope that that is clear. It certainly is to some of my hon. Friends who are nodding, and I am grateful to them for that.

Amendment No. 131 would punish unavoidable delays by ensuring that failure to respond to a notice requiring review would have whatever result the taxpayer sought, irrespective of the merits of the case. I urge the hon. Member for Eddisbury to pause a moment and reflect on the possible practical consequences of such a provision. At its most extreme, every taxpayer may be tempted to request a review, on the ground that there is no liability. An orchestrated campaign could easily leave Customs powerless to undertake detailed reviews within the deadlines, with the result that taxpayers who were properly assessed could escape penalty.

There may be valid reasons for the delay, including the illness of a pivotal departmental official, a significant computer breakdown or a severe postal disruption. It is clearly unreasonable to attempt to punish such delays, as proposed by the amendment.

I remind members of the Committee of my earlier remarks about the ability of Customs, through clause 34(4), to agree to entertain a request for a review outwith the normal time limits if the taxpayer has experienced unavoidable delays.

Jonathan Djanogly (Conservative, Huntingdon)

Surely the purpose of the Bill is not to cater for the sicknesses of individuals in the Inland Revenue. Surely the point is that people want determination within a set period and it is up to the authorities to ensure that they have the organisation to deliver that.

John Healey (Labour, Wentworth)

The hon. Gentleman's point underlines mine. Customs and Excise manages the regime, not the Inland Revenue.

The purpose of the clause, as with the excise regime, is to ensure that traders who believe that judgments are flawed can challenge them and know that that challenge can be made in a timely way. If, for any unavoidable reason, Customs and Excise is unable to meet its part of the arrangement within 45 days, that trader, irrespective of any delays or problems with Customs and Excise, may choose to take the case to a tribunal.

Michael Jack (Conservative, Fylde)

The Minister said that the procedure is paralleled by similar procedures under existing Customs and Excise legislation. Can he tell the Committee whether Customs and Excise has received representations from any representative body complaining about the existing procedures and their operation?

John Healey (Labour, Wentworth)

I regret that I cannot at this stage give a certain response to that question. However, I shall examine it and, if such representations have been received, I will write to the right hon. Gentleman and send a copy to Committee members. I ask my hon. Friends to resist the amendment if the hon. Member for Eddisbury chooses to press it.

Amendment No. 132 seeks to clarify where no clarification is necessary. The clause provides for a 45-day period from the day on which the review is required by the taxpayer under clause 33. Customs and Excise must receive a notice of requirement to be aware of the need to review and the mechanism by which it is made aware is already provided in clauses 33 and 34(1). I hope that I have demonstrated that the amendment is unnecessary and that hon. Gentleman will choose not to press it.

On amendment No. 120, let me say that clause 36 sets out a number of rights and powers concerning tribunals, including the listing of decisions that may be appealed against. To provide certainty, clause 36(1) makes it clear that when Customs and Excise has failed to notify a review decision within the specified period and is consequently deemed to have upheld the original decision in accordance with clause 35(4), the taxpayer has the certainty that he can appeal to a tribunal against the upheld decision should he wish to do so. The same arrangements and powers operate under the excise regime. The amendment would remove that element of certainty for the taxpayer, and I hope that Opposition Members will reflect on that and not press the amendment.

Stephen O'Brien (Conservative, Eddisbury)

I have listened carefully to the Minister and recognise the encompassing approach of clauses 35 and 36.

The hon. Member for Wolverhampton, South-West (Rob Marris) made an interesting intervention, which the Minister found telling. There is a clear answer to the parallel that he drew with planning law, in addition to the incisive observation from my hon. Friend the Member for Huntingdon. The basis of planning law is that a citizen seeks to have something granted by public authorities, whereas the taxing authorities would not be in that position and a review would not be sought if the taxing authorities were not seeking to extract something from the citizen. If one examines carefully the directions that the propositions in those two examples would give, planning law has a slightly different context than the clause, under which the taxpayer needs to be given protection.

John Burnett (Liberal Democrat, Torridge and West Devon)

A more searing and important reason for the analogy being completely inappropriate is that a local planning authority is an arm of the Executive, albeit of local government. The commissioners are part of a judicial and independent function.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the hon. Gentleman, who made an important point that supports an intervention on the previous clause. On the basis that that can be distinguished, the issue is certainty. There is a balance of argument between certainty for the taxing authorities and certainty for taxpayers. One person's draconian power is another person's potential oppression. We must consider that carefully, and while those phrases may seem extreme, they represent the extremes of the argument.

The Minister sought to rely on the difficulty that the amendments might encourage an orchestrated campaign, but, as we are dealing with civil penalties, I respectfully submit that he must not overlook the interplay between the civil penalties and the remaining criminal penalties. If there was an orchestrated campaign or conspiracy, criminal jurisdictions would apply. That is a problem, and the Economic Secretary would not want civil penalties to be substituted. That is a fair distinction.

It is interesting that PricewaterhouseCoopers said of clause 35, and in support the amendment:

''This amendment seeks to remove an unwelcome development. As the relevant clause . . . stands, if the time limit for the Commissioners to reply passes, they are treated as confirming their original notice. This rewards inaction and penalises the taxpayer, who must then appeal to the Tribunal. This does not seem the right balance. In other areas (notably tax clearances) a lack of reply means a decision in the taxpayer's favour. I would not like to see this form of decision by inaction becoming the norm.''

That is the nub of the arguments that we have tried to put across. The amendments may seem at first flush to be de minimis, but they go to the heart of the balance between taxpayers and taxing authorities.

As my arguments do not appear to have gained the Minister's favour, I shall press the amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 9, Noes 15.

Clause 37 - Appeal Tribunals

John Healey (Labour, Wentworth)

I beg to move amendment No. 158, in

clause 37, page 28, line 4, leave out '35' and insert '36'.

Clause 37 provides for appeals against decisions by Customs and Excise to be settled by agreement. It also allows for the recovery of costs awarded against an appellant as though they were customs duty. It is sometimes possible to settle appeal cases by agreement rather than by resorting to a tribunal hearing. The provision, which will result in savings for all parties, mirrors the provisions in use in the VAT civil penalty regime.

I have written to the hon. Member for Eddisbury and other members of the Committee about Government amendment No. 158 explaining that an incorrect reference has unfortunately been included in the published clause. The clause should refer to section 36 of the proposed legislation but instead refers to section 35. The Government amendment therefore corrects the clerical error.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Economic Secretary for writing to all members of the Committee. We agree with the amendment, although I am cross that I had not spotted the mistake because I thought that I had read the Bill from cover to cover.

Amendment agreed to.

Clause 37, as amended, ordered to stand part of the Bill.

Clause 38 - Admissibility of certain

Stephen O'Brien (Conservative, Eddisbury)

The clause relates to the admissibility of certain statements and documents. I want to place on the record the concerns expressed by the Institute of Chartered Accountants in England and Wales. We have not tabled an amendment, but if issues surface in the light of the Economic Secretary's remarks, further consideration may be given to the clause on Report.

The ICAEW states:

''Clauses 38, 98 and 203 are all related to the difference in treatment accorded to direct and indirect taxes and the existence of the hitherto clear Hansard procedure for direct tax which precluded criminal prosecution where a successful negotiation of civil penalty and full disclosure has been made.

We believe the reservation of the right to use information obtained in the process of a successfully negotiated civil settlement without adequate safeguards is contrary to the Human Rights Act 1998 and contravenes the Human Rights Convention.''

We have discussed the matter before and the Economic Secretary has revealed why he believes that our concerns are not founded. It is nevertheless helpful to put the concerns on the record and it will be interesting to hear what he has to say. ICAEW goes on:

''Information obtained as part of a settlement should be inadmissible and a taxpayer who has successfully agreed a settlement should be free from the fear of criminal prosecution unless he has broken the requirements of disclosure. Clause 203 has, we feel, removed the certainty given in the House last November in respect of Hansard. Clause 38 replicates the existing anomaly within section 60(4)''

of the Value Added Tax Act 1994. My hon. Friend the Member for Hertford and Stortford (Mr. Prisk) will discuss clause 98 when we get the chance to debate stamp duty land tax.

The ICAEW concludes:

''Lastly in this respect we have long sought to have a 'joined up' approach whereby a disclosure for the purposes of one tax will be accepted as a disclosure for all taxes provided the taxpayer makes it clear at the time the disclosure is made. This would be an ideal opportunity to introduce this simple but significant improvement to the civil penalties regime.''

On the basis that I outlined earlier, I look forward to the Economic Secretary's reply.

John Healey (Labour, Wentworth)

The hon. Member for Eddisbury has recognised why I believe that the safeguards are adequate across the piece. On the particular point that he raised on behalf of the ICA, the legislation is designed to ensure that in cases in which the taxpayer deliberately misleads Customs and Excise investigators while purporting to assist them following an inducement offer and the deception is subsequently discovered, any evidence collected may be used in a subsequent prosecution. The rule is not designed to promote admissibility; it is a provision to remove a possible bar.

There is a major safeguard for the taxpayer: the decision whether such evidence is admissible will rest with the trial judge, who will be guided by the provisions of section 78 of the Police and Criminal Evidence Act 1984.

Question put and agreed to.

Clause 38 ordered to stand part of the Bill.

Clauses 39 and 40 ordered to stand part of the Bill.

Clause 41 - Regulations and orders

John Healey (Labour, Wentworth)

The final clause in part 3 sets out the scope of the power and the nature of the procedure to make regulations by statutory instrument. Affirmative resolutions of the House will be required for regulations to amend either the maximum permitted penalty or references to Community law. Other regulations, including the schedule identifying the contraventions that can attract civil penalties, are subject to the negative resolution procedure. I can confirm that Customs and Excise will consult business sectors affected by the scope of the schedule through the trade consultation group. I will issue a draft of the schedule during the summer and expect to lay the statutory instrument before the House in the autumn.

Question put and agreed to.

Clause 41 ordered to stand part of the Bill.

Clause 147 - Meaning of ''permanent establishment''

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 99, in

clause 147, page 85, line 29, leave out 'business of the company' and insert 'company's trade'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 100, in

clause 147, page 85, line 32, leave out 'do business' and insert 'engage in trading activities'.

Amendment No. 101, in

clause 147, page 85, line 33, at end insert—

'(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.

Amendment No. 3, in

clause 147, page 85, line 44, leave out paragraph (h) and insert—

'(2A) A building site or construction or installation project constitutes a permanent establishment only if it lasts more than twelve months.'.

Stephen O'Brien (Conservative, Eddisbury)

We move on to my final part of the Bill before the Whitsun recess. Many members of the Committee will breathe a massive sigh of relief because I am on my last lap. My hon. Friends are encouraging me to stay, but I am keen for them to have an opportunity to speak.

Clauses 147 to 155 deal with the definition of the term ''permanent establishment''. Clause 147 is intended to set out the definition in line with the various internationally recognised characteristics commonly used in the UK's double taxation agreements. It will be effective for accounting periods beginning on or after 1 January 2003.

Without doing more than referring all members of the Committee to it, I commend the debate introduced by my hon. Friend the Member for Arundel and South Downs (Mr. Flight) on clause 148 in the Committee of the whole House last week. It would be helpful for members of the Committee to have in mind the arguments presented by him on that occasion and some of the responses given—I should say, issued and received.

I am now facing the Paymaster General instead of the Economic Secretary, and I welcome her to her place. The problem, as I understand it, is that the definition here departs in some respects from that contained in the Organisation for Economic Co-operation and Development model convention, although the relevant parts of that convention are generally contained in United Kingdom tax treaties.

I shall focus on clause 147(2)(h), to which I shall rapidly turn, as we have jumped 100 clauses. That might be false encouragement to some members of the Committee; no doubt we shall return to those that we have just skipped. Subsection (2)(h) treats

''a building site or construction or installation project''

as a ''fixed place of business'', although paragraph 3 of article 5 of the OECD model convention states:

''A building site or construction or installation project constitutes a permanent establishment only if it lasts more than 12 months.''

The clear and obvious solution would be to say that a building site or construction or installation project should not constitute a fixed place of business unless it lasts for more than 12 months.

We are concerned about the discrepancy between the meaning of permanent establishment in Untied Kingdom domestic legislation and the definition of permanent establishment in the bulk of the UK's double tax treaties. That could result, for no good reason, in different tax treatment for non-resident countries based in treaty jurisdictions and those based in non-treaty jurisdictions.

Amendment No. 3 replicates paragraph 3 of article 5 of the OECD model convention. Obviously, an alternative approach would have been to redraft subsection (2)(h) to read,

''a building site or construction or installation project that lasts for more than 12 months'',

which would compare to paragraph 2(g) of article 4 of the treaty with France. However, that would be less favourable than amendment No. 3, because a building site or construction or installation project that lasted for less than 12 months might still amount to a fixed place of business in certain circumstances. It is worth noting that the opening of subsection (2) states that the list in paragraphs (a) to (h) is

''without prejudice to the generality of''

the expression ''fixed place of business''. That series of arguments has been widely supported by the Chartered Institute of Taxation, the Institute of Chartered Accountants in England and Wales and the Law Society.

Turning to the other amendments, the Chartered Institute of Taxation, having already commented adversely on the new definition of ''permanent establishment'', thinks that the words ''authority to do business'' in subsection 1(b)

''are vague, and do not specify the essential criterion that the agent must be in a position to bring the principal into a binding agreement with the customer. The Inland Revenue have indicated in consultation that a person will only be treated as an 'agent' in circumstances where that person can bind the principal.''

The Inland Revenue has confirmed that the references in subsection (1)(a) and (b) to the carrying on of business and the exercise of ''authority to do business'' are limited to business activity of a trading nature by virtue of the provisions in section 18(1)(a)(iii) of the Taxes Act 1988. Therefore, looking at amendments Nos. 99 and 100, I support the Chartered Institute of Taxation's submission that in clause 147(1)(a) the reference to the ''business of the company'' should be replaced by a reference to the ''company's trade'', and that in subsection 1(b), the words ''do business'' should be replaced with the words ''engage in trading activities''.

The Inland Revenue said in consultation that the permanent establishment provisions will not apply unless the non-resident is exercising a trade in the UK; in other words, the carrying on of a non-trading business activity is outside the scope of the legislation. It went on to recommend that the legislation should clarify those points to avoid any misunderstanding over whether a person acting as a representative without authority contractually to bind their principal is an agent. It also recommends that it is confirmed that references to the carrying on or exercising of authority to do business are limited to activity of a trading nature, and that investment business activity is outside the scope of the legislation.

Turning to what the Institute of Chartered Accountants in England and Wales has to say, as already explained, the OECD published a consultative document in March 2001 on the issues surrounding permanent establishment. The ICAEW has identified that the problem arises in relation to ''dependent agents'', a point that was made earlier. It says:

''The authority of the agents should only apply to authorities to carry on the trade in question and not to authority to do business. This in particular will give rise to widespread compliance issues for potential agents who constitute permanent establishments even where there was no trade. These provisions should be amended accordingly.''

It also notes that in subsection (1)(b),

''an agent who 'habitually exercises authority to do business on behalf of the company' will constitute a Permanent Establishment of that company in the country where the agent operates. The OECD Model Treaty still only treats an agent as a Permanent Establishment when the agent '(has) and habitually (exercises) the right to conclude contracts' in that country''—

as opposed to its having authority in that country. It continues:

''We believe that the UK law should follow closely the relevant OECD model until such time as the OECD model is amended.''

I turn to the Law Society. It is very interesting that the submissions of these societies all support one another, and that they have all expressed concerns about the various difficulties reflected in the different amendments. The Law Society, after agreeing with what I have just said on amendments Nos. 3, 99 and 100, says on the matter addressed by amendment No. 101:

''The Inland Revenue have also confirmed that the reference in clause 147(1)(b) to an agent is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority.''

The Law Society suggests, and I agree:

''In order to clarify this point we recommend that that term 'agent' is defined to mean 'a person who has authority to and regularly does enter into arrangements on behalf of his principal which are contractually binding on that principal'.''

For the convenience of the Committee, you have been encouraging us to raise any stand part issues at the same time as the amendments, Sir Nicholas. Recognising that, I raise some small points that the Paymaster General may wish to contemplate addressing on Report, as well as directly addressing the amendments. They pick up on some further points suggested by the ICAEW. It notes that

''subsection (5) does not include a category (e) along the lines of the existing OECD Model Treaty. This subsection states that any combination of the activities listed under the equivalent of (5)(a) to (d) would also not constitute a Permanent Establishment. We recommend that an additional subsection along these lines be included for the avoidance of doubt and to ensure that the UK rules are consistent with the OECD rules.

This provision applies to accounting periods beginning on or after 1 January 2003. It is not acceptable for these provisions to apply before the relevant provisions are enacted. The start date should be amended so that it applies to accounting periods beginning on or after Royal Assent.''

I put those points on the record, and they will no doubt be considered when it is available.

I hope that the points that I have made were as succinct as they could have been on this quite complex matter, which is definitional because it constitutes a move forward. I have sought to make arguments that jointly and severally support amendments Nos. 3, 99, 100 and 101. I hope that the Paymaster General will find that they were made sufficiently cogently for her to accept the amendments. I look forward to her response.

John Burnett (Liberal Democrat, Torridge and West Devon)

Sir Nicholas, I have not had an opportunity to welcome you. I have served under your chairmanship on many occasions, not just in various Standing Committees—you are also the Chairman of the most illustrious Committee in the House: the Procedure Committee.

Stephen O'Brien (Conservative, Eddisbury)

What does the hon. Gentleman want?

John Burnett (Liberal Democrat, Torridge and West Devon)

I want an opportunity to speak about amendment No. 101 in particular, although there are good reasons for the other amendments about which the hon. Gentleman spoke. The Chartered Institute of Taxation and the Law Society have raised points, as the hon. Gentleman said. There are two simple points on amendment No. 101. First and foremost, is it right that, under British law, including British tax law, any representative can be referred to as an agent? Surely it is part and parcel of the law of agency that someone is an agent only if they can bind their principal. Any representative cannot and should not be called an agent. That is part of British law and international tax practice.

The second point has been raised by the Law Society. As the hon. Gentleman said, the Revenue has confirmed, with reference to the definition of ''agent'', that it will treat only those persons who contractually can and do bind their principals as agents for the purposes of the clause. If that is the case, why can that not be in the Bill? That would be in the interests of the country's commercial activities. It is important that we trade overseas and welcome overseas investment. It is not in the interests of our economy to have vague laws and laws that do not stand on all fours in relation to international practice. It is in our interests for people to know exactly where they stand. I hope that the Paymaster General will accept amendment No. 101, in particular. It makes sense, is compelling and rights a wrong.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend the Member for Eddisbury mentioned the OECD convention discrepancy. I fully agree with that point. More basically, the wording in the clause is vague, which is why I support amendment No. 99. We need to specify that the business of the company is the company's trade. I understand from what I read in the Chartered Institute of Taxation book that the Inland Revenue has indicated in consultation that the provisions in the clause will not apply unless a non-resident is exercising a trade in the United Kingdom. There is a need to make it clear that the continuation of a non-trading business activity is outside the competence of the legislation.

May I draw the Paymaster General's attention to what appears to be a typo? In subsection (1)(b) ''there'' should presumably be ''their'', or more properly, ''the company's''. Either way, it is pretty shoddy drafting.

On amendment No. 101, I essentially agree with my hon. Friend's analysis. I would just add that the word ''agent'' is a commonly used expression in business and is often used where there is, and is not, authority to bind the company that is using the agent. To that extent, it is necessary to clarify whether the provision will apply only when the agent can bind its principal, not only for technical purposes, but for those of the normal taxpayer when considering the legislation.

John Burnett (Liberal Democrat, Torridge and West Devon)

Does the hon. Gentleman agree that it will be extremely confusing for overseas taxpayers sending representatives to this country if they do not have the authority to bind, and they are suddenly caught by the provisions?

Jonathan Djanogly (Conservative, Huntingdon)

The hon. Gentleman makes a good point and, considering the matter the other way round, I am concerned for the English taxpayer, who is the agent and might not know where he stands.

Stephen O'Brien (Conservative, Eddisbury)

My hon. Friend is making some very interesting and valuable points that support the arguments on the amendments, but to put his mind at rest on something that is not subject to the amendments, the spelling of ''there'' probably is correct in the context of the clause because it relates to territory. It happens to be rather inelegant word order, so I understand why he has found that difficult to pick up.

Jonathan Djanogly (Conservative, Huntingdon)

I thank my hon. Friend for clarifying that for me.

On amendment No. 3, I fully support what my hon. Friend said. We clearly do not want a situation in which temporary building works to build the most minor projects could be subject to the same treatment as factories and offices. A building site of less than a year is clearly not permanent.

John Baron (Conservative, Billericay)

As we know, clause 152 replaces references in the Taxes Act 1988 to ''branch'' or ''agency'' with references to ''permanent establishments''. Clause 147 redefines the term ''permanent establishment'' in that context. The definition has been widened beyond the definition of ''branch'' and ''agency'' so that some non-resident companies, not previously subject to UK corporation tax, may become taxable under the new rules. I have one or two key concerns about that.

First, as my hon. Friend the Member for Eddisbury has already highlighted, in certain respects the definition departs from that contained in the OECD model convention, although the relevant parts of that convention are generally contained in UK tax treaties. An example was given with regard to building sites. That is an area of concern because the discrepancy could lead for no good reason to different tax treatment for non-resident companies based on treaty jurisdictions as compared with non-treaty jurisdictions. I ask the Paymaster General to clarify that, because it would be helpful for all concerned.

Howard Flight (Conservative, Arundel and South Downs)

I wonder whether my hon. Friend has focused his mind on whether the changes could result in hedge funds outside the UK, whose transactions are frequently handled in the City of London, falling within the definition of residence. That would be a disaster for the City, because business would go elsewhere if that were the effect.

John Baron (Conservative, Billericay)

My hon. Friend makes an excellent point. That is a consideration. When it comes to the City, competitiveness is all-important, and if the new legislation ensnarls hedge funds, it could result in the City of London and other financial cities throughout the UK losing business. I ask the Paymaster General to bear that in mind, and address the issue when she sums up.

I turn to another issue that concerns me, and ask the Paymaster to address it. The definition of permanent establishment in clause 147 will widen the tax liabilities of foreign companies doing business in Britain. Although none of us would condone tax avoidance, I would suggest that the relatively favourable tax regime in this country for overseas companies has been one of the factors that has contributed to our economic well-being, certainly when compared with our competitors. It is no accident that our structural unemployment rate is far less than it is on the continent and across the eurozone as a whole.

Most independent observers would acknowledge that part of the reason for that is that we have had much more flexible practices than on the continent, thanks largely to previous Conservative Governments, part of the reason is that the United Kingdom has not signed up to the euro and part of the reason is that we have had a relatively favourable tax regime for overseas companies compared with other countries, particularly those in the eurozone and on the continent.

I believe that the clause threatens that tax advantage. On its own it will not be a major factor in weakening our economic competitiveness, but taken with all the other regulations on taxes with which the Government have burdened our economy since they came to power, I suggest that it will have an effect, and is having an effect now.

I therefore ask the Paymaster General three questions. To what extent do the Government believe that the definition of permanent establishment widens the UK tax liabilities of foreign companies? Have the Government estimated the likely impact of the definition of permanent establishment on foreign investment? Would she consider carrying out an impact assessment of those two issues to determine what effect the clause has on our economic competitiveness?

Dawn Primarolo (Labour, Bristol South)

I congratulate the hon. Member for Eddisbury on introducing his amendments so succinctly. He is right: this is a complicated area of international tax law, relating to the combination of UK domestic law, international agreements through the OECD guidelines and the OECD's commentary on its standard guidelines. Regular members of the Finance Committee or hon. Members who, like the right hon. Member for Fylde (Mr. Jack), have in a past life been members of double taxation committees scrutinising the introduction of double taxation treaties in the United Kingdom will understand that the question of permanent establishment is crucial for determining the respective taxation rights of the United Kingdom and the country with which it is entering into the treaty. The hon. Member for Eddisbury is right that the OECD model recommends a 12-month period, but we now have more than 100 tax treaties and the time period for permanent establishments varies.

I want to deal first with the points raised in the amendments and then turn to the other issues that hon. Members have mentioned this afternoon.

As I said on another clause in the Committee of the whole House, UK banks are at a tax disadvantage compared with foreign banks as regards their operation in the City of London, whether or not branches of foreign banks pay UK corporation tax. That is the point at which the clause starts.

John Baron (Conservative, Billericay)

Will the Paymaster General give way?

Dawn Primarolo (Labour, Bristol South)

I am happy to give way, but this is a general point about the clause rather than the amendment.

John Baron (Conservative, Billericay)

Absolutely—point taken. I am delighted that the Paymaster General is defending UK banks, but the UK banks and the banking structure generally recognise that the tax advantages offered to foreign banks add to the vibrancy of the City and to its attractiveness as a commercial centre. Very few UK banks complain about the tax treatment of UK branches of overseas banks.

Dawn Primarolo (Labour, Bristol South)

I do not know which branches or banks the hon. Gentleman speaks to, but not only was the tax position of foreign branches in the City of London a matter of concern, particularly compared with UK banks, but there was international concern about whether the practice was fair. As I go through the amendments, I may be able to refer back to the hon. Gentleman's point.

Amendment No. 3 would copy into UK domestic law the existing provisions of paragraph 3 of article 5 of the OECD model tax convention by specifying that a building site, construction or installation would not constitute a permanent establishment unless it had existed for 12 months or more. If a foreign company had a building site in the UK for less than 12 months, there would be no permanent establishment, so it would not be chargeable to corporation tax in respect of its presence in the United Kingdom. A blanket 12-month time limit would not be appropriate because the general rules contained in the clause will be subject to the specific time limits contained in the United Kingdom's double taxation agreements with other countries, many of which contain a shorter time limit, such as three or six months.

Treaties can override domestic law to provide relief from UK tax, but they cannot create a charge to tax if none exists in UK domestic law. Therefore, if a treaty specified a time limit of six months, but UK domestic law set a time limit of 12 months, which would be the effect of the amendment, the domestic law would apply. The United Kingdom would, therefore, effectively give up taxing rights that it had achieved through bilateral negotiations with other countries. I understand that about 43 of our current treaties are for periods of less than 12 months.

It may help the Committee if I give an example. Our double taxation agreement with Ireland provides that a building site will constitute a permanent establishment if it exists for more than six months. After six months, Ireland can tax the profits of a UK company attributable to its Irish building site, and vice versa. However, if the UK were to introduce a 12-month time limit into domestic law, we could tax the Irish company's profits from its UK building site only if it existed for 12 months or more, even though the double taxation agreement set a six-month time limit. Therefore, the United Kingdom would be giving up taxing rights, but Ireland would not.

I am sure that that was not the intention of the hon. Member for Eddisbury when he tabled his amendment probing why the 12-month standard was not used. All members of the Committee can see that there is no good reason to give up taxing rights that have been agreed in negotiations with other countries. I therefore ask the Committee to reject the amendment if it is put to the vote. I have not asked anyone to calculate how much tax would be given up—it would be a substantial amount—on the basis that I understand that the amendment has been tabled to probe the 12-month issue and is not a serious suggestion that we should undermine our tax treaties in such a way.

I have explained why it is not appropriate to incorporate into UK law the exact wording used in paragraph 3 of article 5 of the OECD model tax convention. That is why there is no 12-month limit for building sites for permanent establishments. Hon. Members who sit on Committees that deal with double taxation will have heard me say on many occasions when discussing treaties for ratification by the House that we, like the previous Government, attempt to stick as closely as we possibly can to the wording, because we support the OECD model. However, it is not always possible to do that in negotiations, because the wording is affected by what our treaty partners seek to achieve in the negotiations.

However, for the purposes of the clause, the wording used in article 5 of the OECD model tax convention has been incorporated into clause 147, where possible. The OECD wording and terminology was used where it did not conflict with that commonly used in the UK's double taxation agreements, where it was clear and unambiguous and where the terminology fitted with the language commonly used in UK domestic law. Amendments Nos. 99 and 100 run contrary to that approach, as they seek to insert language that differs from that used in article 5 and from that commonly used in the UK's double taxation agreements.

It may be useful if I explain the two sets of circumstances in which there is deemed to be a permanent establishment. The first is if the non-resident company has a fixed place of business in the UK, and the second is if there is an agent in the UK who has the authority to do business on behalf of the company—that is, if the foreign company has what is commonly known as a dependent agent.

Amendments Nos. 99 and 100 seek to change that so that there will only be a fixed place of business, or a dependent agent, where there is evidence that the foreign company is trading through the fixed place of business or where there is evidence that the dependent agent has the authority to engage in trading activities on behalf of the foreign company. As I mentioned, that represents a move away from the wording generally used in the UK's double taxation agreements and from that used in the OECD model tax convention. The proposed change would also narrow the definition of permanent establishment, because the activities encompassed by the term ''trading'' are different and generally narrower than the activities encompassed by the term ''business''.

However, the narrower definition would not actually alter the tax position of foreign companies. That is because the permanent establishment of a foreign company is chargeable to corporation tax under section 11 of the Taxes Act 1988 only if it trades through a permanent establishment in the UK. Amendments Nos. 99 and 100 are unnecessary, as they would move away from the wording commonly used in defining a permanent establishment and would not alter in any way the tax position of the foreign company. Therefore, I ask members of the Committee to reject the amendment if it is pressed to a vote.

I come now to amendment No. 101. I have explained the circumstances in which a permanent establishment can exist, and explained that one such situation is if a dependent agent acts on behalf of the foreign company. The wording used in clause 147(1)(b) to define a dependent agent varies from the exact wording used in paragraph 5 of article 5 of the OECD model tax convention. It is based instead on the guidance given in the commentary on article 5, which can be found in paragraphs 31 to 35. The reason for that is that article 5 refers to the agent who has the authority to conclude contracts in the name of the enterprise. However, the OECD commentary on article 5 makes it clear that—

Sitting suspended for a Division in the House.

On resuming—

Dawn Primarolo (Labour, Bristol South)

Before we suspended the Committee, I referred to amendment No. 101, which deals with the issue of a dependent agent acting on behalf of a foreign company. I explained to the Committee that the wording used in clause 147(1)(b) to define ''dependent agent'' varies from the exact wording in article 5(5) of the OECD model tax convention. Instead, it is based on guidance given in the commentary on article 5, which can be found in paragraphs 31 to 45, because article 5 refers to an agent who has the authority to conclude contracts in the name of the enterprise.

However, the OECD commentary on article 5 makes it clear that that phrase is not necessarily to be taken at face value. For instance, it covers contracts in the name of an enterprise, contracts binding on the enterprise but not in its name, and contracts recognised by the agent but signed by some other person, while excluding contracts that do not relate to the business proper of the enterprise, although concluded by the agent. The area is very complicated and there is an interaction between the commentary and the article itself.

United Kingdom legislation cannot be directly interpreted by reference to the commentary, so the phrase used in clause 147 is intended to encapsulate the current OECD interpretation in respect of dependent agents. That would not have been achieved if the wording in article 5(5) were copied directly into UK domestic law.

John Burnett (Liberal Democrat, Torridge and West Devon)

The Paymaster General will recall that one of the arguments used by me, the hon. Member for Eddisbury and one or two others who spoke on the matter was that the Inland Revenue confirmed that the reference to an agent in clause 147 is restricted to those persons who contractually can and do bind their principals and not to persons acting in some other representative capacity falling short of having such authority. The Paymaster General is obviously well aware of Pepper v. Hart and the reliance people may put on what she says in Committee. I would welcome her comments on that point raised by the Law Society.

Dawn Primarolo (Labour, Bristol South)

I was coming to that important point, which was outlined in a letter to the Law Society and the Chartered Institute of Taxation on 8 May.

I was trying to explain that the article wording must be read in parallel with the commentary. The commentary needed to be part of the description that went into UK legislation in order to make that clear. In drafting the legislation, the importance of maintaining certainty on international understanding and practice on the OECD guidelines and model conventions while understanding how the commentary affects their operation was one of the major points, which was continually made to the Revenue and me. That is how we chose the clause's wording.

Amendment No. 101 seeks to add to the definition of dependent agent used in clause 147(1)(b). It would mean that an agent would be a dependent agent of a foreign company as long as they had the authority to enter into arrangements on its behalf and had entered into contractually binding arrangements with it. That may not have been the amendment's intended effect, but I ask the Committee to reject it nevertheless. The suggested addition is unnecessary and the language used in clause 147(1)(b) already reflects the current OECD position on dependent agents. As such, no further clarification or definition is required.

The hon. Members for Eddisbury and for Torridge and West Devon referred to correspondence and representations from both the Law Society and the Chartered Institute of Taxation. The Inland Revenue's view on dependent agents was set out in its letter of 8 May to the Chartered Institute of Taxation. Unfortunately, I cannot circulate the entire letter to the Committee because it covers other issues and it is up to the institute whether it wants to circulate them. However, I can ensure that the relevant parts of the letter are circulated.

The hon. Member for Torridge and West Devon wants the pertinent points in the letter read into the record. The letter states that the commentary—the OECD model tax convention—

''makes it clear that the phrase 'authority to conclude contracts' in para 5 (5) is not necessarily to be taken at face value. For instance it covers contracts in the name of the enterprise, contracts binding on the enterprise but not in its name and contracts negotiated by the agent but signed by some other person, while excluding contracts which while concluded by the agent do not relate to the 'business proper' of the enterprise.''

That was my precise point before we broke for the Division in the House.

''Given that UK legislation cannot be interpreted by reference to the commentary except where, in treaty cases, this might lead to a different result, the phrase used is intended to encapsulate the current OECD interpretation of para 5 (5)''.

When the hon. Member for Torridge and West Devon studies both the record of the Committee and the relevant sections of the letter from the Inland Revenue to the Chartered Institute of Taxation, he will feel happier about the issue.

I again ask the hon. Member for Eddisbury to withdraw the amendment. If he feels unable to withdraw it, however, I will ask my hon. Friends to reject it. The Bill does not extend the charge to tax on non-resident companies and there is no less certainty for an agent of a non-resident company on whether they are within the charge to corporation tax. The rules are set out in the OECD treaty and commentary and in UK law, which has had and will have specific rules to facilitate foreign investment in the City.

I apologise for the length and detail of my response to the hon. Gentleman's questions and amendments, but I hope that I have made it clear that clause 147 provides the certainty that business requires on the issues of dependent agent, permanent establishment and the need for certainty in the rules. I therefore ask the hon. Gentleman to withdraw the amendment.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for patiently setting out the reasons behind the drafting and the various complex considerations. She will recognise that the amendment and the broader arguments that I adduced in support of it in my introductory remarks necessarily took in a wide but detailed canvas, which is the nature of the clause.

I have listened carefully to the Paymaster General's argument. Amendment No. 3 relates to the 12-month period, and it forms no part of our argument wittingly or unwittingly to forsake revenue due to the Treasury. At the same time, we were looking for certainty. I make no apology for not being an expert in more than 100 double tax treaties and she is far more likely than I to be expert on them. I have, however, served on several Standing Committees and Delegated Legislation Committees that have examined the double taxation treaties. I understand that there are variations and that the model that informs them is, of course, a model and not a prescription. I will not therefore seek to press amendment No. 3.

Remarks made by the hon. Member for Gravesham (Mr. Pond) were ill-judged. He thought that the amendments were an attempt to argue for tax harmonisation across Europe. The point was unworthy, cheap and unnecessary given that we are looking for sufficient consistency and understanding to give certainty to those who must deal with those matters. He knows that—this point was well made by my hon. Friend the Member for Huntingdon—anything that attacks and erodes the UK's tax competitiveness is anathema to my hon. Friends and me.

We have put forward a series of arguments on amendments Nos. 99 and 100 and the Paymaster General has addressed them. I can therefore confirm that we will not press the amendments.

However, we are not in a position to seek to withdraw amendment No. 101. Although the Paymaster General set out with some care why she felt that the commentary could not be incorporated into domestic UK legislation, it is important to put down a marker on the concerns raised by the clause, some of which were articulated by the hon. Member for Torridge and West Devon. I should also like to emphasise that my hon. Friend the Member for Arundel and South Downs was very concerned, rightly, about the position of hedge funds, which form a significant sector of UK business.

Dawn Primarolo (Labour, Bristol South)

I apologise. I did have a point to make about hedge funds. The position is the same as at present. If the manager of a hedge fund is independent, the same tests apply as before. They are not within the scope of corporation tax. The rules are the same.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General, who anticipated what I was about to say. My hon. Friend the Member for Arundel and South Downs raised what is an important point, not least because were the Paymaster General not able to say what she has just said, there would be, to coin a phrase, real concern about ''flight'' capital. I was seeking confirmation that, in relation to hedge funds that are not based in the UK, the provisions will not affect the way in which business is done in London, bearing in mind the interaction between management in London and the broker agreement.

What the Paymaster General said was helpful. I am also grateful to her for saying that she will make available to all members of the Committee the relevant extracts from the letter to the Chartered Institute of Taxation and the Law Society. Clearly, they made a number of representations on the clause.

On the basis that it is important to register that there has been concern and to demonstrate that the matter has been properly considered, I will press amendment No. 101 to a vote. What lies on the record underpinning the arguments in relation to the incorporation of the commentary has been noted and we will be able to proceed on that basis. By pressing for a vote, we can convey to all those who are concerned that the matter has been fully considered.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 101, in

clause 147, page 85, line 33, at end insert—

'(1A) For the purposes of subsection (1)(b) an agent can only be a person who has authority to and does enter into arrangements on behalf of that person's principal which are contractually binding on that principal.'.—[Mr. Stephen O'Brien.]

Question put, That the amendment be made:—

The Committee divided: Ayes 10, Noes 17.

Clause 149 - Non-resident companies: assessment,

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 95, in

clause 149, page 89, line 15, at end insert—

'(3A) Where the UK representative of a non-resident company is a person separate from that company it shall be entitled—

(a) to be indemnified in respect of any liability that it discharges as mentioned in subsection (3)(a) above; and

(b) to retain, out of any sums otherwise due from it to the non-resident company, or received by it on behalf of the non-resident company, amounts sufficient for meeting any obligations or liabilities that he has under subsection (1) above or has discharged as mentioned in subsection (3)(a) above.

(3B) The obligations relating to the furnishing of information which are imposed by this section on the UK representative in a case where that representative is an independent agent shall not require that representative to do anything except so far as it is practicable for the representative to do so by acting to the best of his knowledge and belief after having taken all reasonable steps to obtain the necessary information.

(3C) Subsection (3B) above shall not have the effect of discharging the non-resident company from any obligation to furnish information in a case where that obligation has been discharged by its UK representative by virtue only of subsection (3B) above.'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss amendment No. 96, in

clause 149, page 89, line 34, at end insert—

' ''independent agent'', in relation to a non-resident company, means any person who is the non-resident company's UK representative in respect of any agency from the non-resident company in which he was acting on the non-resident's behalf in an independent capacity; and a person shall not be regarded as acting in an independent capacity on behalf of a non-resident company unless, having regard to its legal, financial and commercial characteristics, the relationship between them is a relationship between persons carrying on independent businesses that deal with each other at arm's length;'.

Stephen O'Brien (Conservative, Eddisbury)

It is of great relief to find that I am not alone in finding some of the issues before us very complex, because it is clear that other Committee members do as well. The issues reward a certain amount of study, to say the least. There was a moment, shortly after we resumed, when I hoped that the Paymaster General would make very few remarks, because, at that point, we might have been able to prevail in the vote, but, unfortunately, she had to continue, and I dare say that that was not 100 miles from her mind at the time.

That said, we move to clause 149. As I mentioned earlier, clause 148 was dealt with in Committee of the whole House ably and cogently by my hon. Friend the Member for Arundel and South Downs. Clause 149(1) will make the UK representative of a non-resident company that is trading in the UK through a permanent establishment—that is the UK representative—liable for non-resident companies corporation tax. When the UK representative is a separate person—that is an agent rather than a branch of the company—it is appropriate that he should have right of recovery or retention in respect of the corporation tax liability. Subsection 3A in amendment No. 95 would address that point.

Rob Marris (Labour, Wolverhampton South West)

In the second line of proposed subsection (3A), the word ''it'' appears. To which entity does ''it'' apply?

Stephen O'Brien (Conservative, Eddisbury)

I am glad that the hon. Gentleman is so avidly following the cogency of my arguments. In that context, ''it'' refers to the UK representative of a non-resident company.

Rob Marris (Labour, Wolverhampton South West)

Not to the preceding noun.

Stephen O'Brien (Conservative, Eddisbury)

Indeed, the hon. Gentleman is right. We have tried to follow the way that the rest of the Bill is drafted. The wording is clear, given that the clause deals with that aspect and is so titled. I hope that that clarification helps. I do not believe that that discloses a flaw because I believe the amendment will be interpreted correctly by those familiar with such provisions in the professional world.

On amendment No. 95, it is worth comparing schedule 23 to the Finance Act 1995, in which obligations are imposed on UK representatives, although the right of recovery in that case is limited to independent agents of the non-resident company. New subsections (3B) and (3C), which are also contained in amendment No. 95, restore provisions of the existing law—namely schedule 23 paragraphs 4(1), and 4(2)(a) of the 1995 Act.

Frankly, I think that amendment No. 96 speaks for itself. My very aged legal training reminds me that the applicable phrase is res ipsa loquitur, and the definition of ''independent agent'' is clearly set out. It adds clarification to the clause and its context in the Bill, and I hope that it will find favour with the Paymaster General, who will consider it a helpful suggestion.

Dawn Primarolo (Labour, Bristol South)

The amendments would introduce indemnities and protections for independent agents who are the tax representatives of non-resident companies. As the amendments replicate the existing provisions of schedule 23 to the Finance Act 1995, I assume that they are prompted by the fact that previously an independent agent could be a tax representative, so an indemnity was desirable and included in the legislation. However, the clause provides that tax representatives for non-resident companies are now their permanent establishments, so independent agents who are prevented from being the permanent establishments of non-resident companies by clause 147(3) cannot be the tax representatives of non-resident companies. Therefore, the amendments are unnecessary.

Independent agents may continue to be the tax representatives of persons other than non-resident companies. They will, however, continue to enjoy the equivalent protections proposed by the amendment, which can be found in schedule 23 to the Finance Act 1995.

I hope that the hon. Gentleman will accept that his probing amendment demonstrates that the coverage is there, the indemnity is not necessary and the permanent establishment requirement for the non-resident company is met. I ask him to seek to withdraw the amendment, but if he feels unable to do so and puts it to a vote, I shall ask my hon. Friends to oppose it.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for that succinct and clear explanation. She rightly identified, as I believe I had done, the replication of existing law.

The essence of the clarification is the interaction between this clause and clause 147, which has just been agreed to. Therefore, because of the definitional change, the question whether an unbroken chain of indemnification is required is no longer relevant. I accept the Paymaster General's helpful explanation and am glad that it is on the record. I therefore beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 149 ordered to stand part of the Bill.

Clause 150 - Non-resident companies: extent

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 97, in

clause 150, page 90, leave out lines 5 to 7.

This is a probing amendment relating to non-resident companies and the extent of charge to income tax. The clause provides that a non-resident is subject to income tax by withholding only in the case of income falling within subsection (2), rather unhelpfully referred to as

''income to which this section applies''

and on other UK-source income in respect of which it is not liable to corporation tax.

I tabled an amendment to probe the position, because it is not clear to me why, on calculating the tax on income falling within paragraph (b)—other UK-source income in respect of which a non-resident is not liable to corporation tax—one has to disregard relief under double tax treaty as required by subsection (1)(a)(ii). There is probably a sound technical explanation, but it escapes me, so I look forward to hearing what the Paymaster General has to say.

Dawn Primarolo (Labour, Bristol South)

I am grateful to the hon. Gentleman for tabling this probing amendment to tease out the precise interactions between the clauses that follow on from clause 147. The amendment would upset the existing basis of computing the limit of income tax on foreign companies from investments in the UK other than property and from any trading in the UK through a broker or investment manager. At present, the maximum such foreign companies can pay is the tax, if any, deducted at source.

The clause is a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies. It is necessary following the change from ''branch or agency'' to ''permanent establishment'' that is introduced by clause 147.

The subsection that the amendment seeks to leave out does not prevent double taxation relief from being claimed. The position regarding such relief remains exactly as it was, and the clause limits the income tax chargeable before double taxation relief, as was previously the case. The double taxation relief would be given in any assessment, subject to the usual rules. That ensures that the UK income tax liability of a non-resident company is properly aligned to the amount due in accordance with any relevant tax treaty.

I hope that the hon. Gentleman will accept that explanation. He may feel that he wants to study the issues a little more, but I hope that he is reassured that the clause is, as I said, a consequential adjustment to replicate exactly the effect of section 128 of the Finance Act 1995 on foreign companies.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for that clear explanation, which demonstrates an internal consistency in the light of clause 147. Therefore, as I indicated that this was a probing amendment, and as I am satisfied with the explanation, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 150 ordered to stand part of the Bill.

Clause 151 - Non-resident companies: transactions

Stephen O'Brien (Conservative, Eddisbury)

We have discussed several clauses for which the meat is found in a schedule. Therefore, I shall proceed on the basis of registering the fact that the Conservatives will not object to the clause stand part, but our agreement is subject to the way in which we discuss the amendments that we have proposed on schedule 26, which supports clause 151. The formal procedures do not allow us to reflect our concerns at this point.

Nicholas Winterton (Conservative, Macclesfield)

The hon. Gentleman will be able to deal with the amendments that have been selected and, if necessary, I will be happy to grant a stand part on the schedule. However, based on the way in which the Committee has been proceeding, I suspect that most of the matters will be dealt with in detail during the discussion on the lead amendment and those that will be taken with it.

Question put and agreed to.

Clause 151 ordered to stand part of the Bill.

Schedule 26 - Non-resident companies: transactions

Stephen O'Brien (Conservative, Eddisbury)

I beg to move amendment No. 92A, in

schedule 26, page 344, leave out lines 36 to 38 and insert—

'(c) either—

(i) the remuneration he receives in respect of the transaction for the provision of the services of a broker to the non-resident company is not less than is customary for that class of business; or

(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 93, in

schedule 26, page 345, leave out lines 12 and 13 and insert—

'(c) either—

(i) the remuneration he receives in respect of the transaction for the provision to the non-resident company of investment management services is not less than is customary for that class of business; or

(ii) he acts on behalf of the non-resident company in relation to the transaction in an independent capacity; and'.

Amendment No. 94, in

schedule 26, page 345, leave out lines 15 to 17.

Stephen O'Brien (Conservative, Eddisbury)

We come to schedule 26; this is the first time that we have strayed into the second volume of the Bill. The amendments relate to a similar line of argument.

The schedule largely re-enacts the existing law in section 127 of the Finance Act 1995 and the Opposition find it broadly acceptable. However, paragraph 2(c)(ii) seems to be anti-competitive because, if a broker is prepared to carry on business for less than the usual level of fee or commission, he risks becoming a permanent establishment of a non-resident company and liable for any corporation tax chargeable on the non-resident company as a consequence of transactions carried out through it. Amendment No. 92A would provide that a lower-than-customary fee or commission could safely be charged provided that the broker acted in an ''independent'' capacity. That is covered by paragraph 7(2) of the schedule.

John Burnett (Liberal Democrat, Torridge and West Devon)

I appreciate that the Opposition do not have armies of civil servants to help us. Does the hon. Gentleman mean by ''independent'' not connected within the meaning of the Taxes Act 1988 and not an associated or subsidiary company? Can he give a slightly more detailed description of what he means by ''independent''?

Stephen O'Brien (Conservative, Eddisbury)

It is important that I do not seek to advance arguments for putting in legislation words and definitions that are not well established within the meaning of independence. The definition of a broker acting in an independent capacity is already contained in the Bill and earlier tax legislation. The issue at stake is not so much the question of how the action takes place in an independent capacity, which is established, but the way in which the provisions work. When a broker transacts business for a lower-than-customary fee or commission, he must act in an independent capacity; otherwise, there would be a link that would raise other presumptions.

Rob Marris (Labour, Wolverhampton South West)

In paragraph 2(1) of the schedule, the words ''independent status'' are used. Under amendment No. 92A, paragraph 2(2)(c) would contain the word incapacity—that is a Freudian slip. I meant to say that the words ''independent capacity'' are used. It seems to me and, perhaps, the hon. Gentleman, that his amendment is suggesting a circular definition. Perhaps he can help the Committee by differentiating between independent status and independent capacity.

Stephen O'Brien (Conservative, Eddisbury)

The hon. Gentleman will accept that paragraph 3(2)(c) refers to ''independent capacity'' and that is replicated in the amendment. We tried to be consistent with the schedule and I shall delineate the issue. The schedule must work and is largely a re-enactment. It is not trying to reinvent anything, but it is trying to provide a greater degree of consistency and clarification.

Amendment No. 92A would solve the difficulty in paragraph 2(2)(c) of schedule 26, replacing what is in line 36 with new wording. Paragraph 3(2)(e) suffers from the same defect, so we propose both to delete that paragraph and replace paragraph 3(2)(c) with the wording in amendment No. 93, which picks up on the exact wording that amendment No. 92A identifies. We would then have total internal consistency because the phrase ''independent capacity'' is already used in paragraph 3 but not found in paragraph 2 as it stands. Hence, although the hon. Gentleman thought that our proposal was circular, we are actually attempting to square the circle in the schedule, providing internal consistency and ensuring that the measure works fairly and properly. Paragraph 3(2) already contains the requirement for an investment manager to act in an independent capacity, so if we replaced paragraph 3(2)(c) with the wording in amendment No. 93, that would improve the drafting.

A further, general point is supported by the Chartered Institute of Taxation, which has said:

''Schedule 26 paragraph 3 deals with investment transactions carried out through investment managers. Subsection (3) defines investment transactions. The wording in paragraph 3(a) needs to include contracts for differences. We understand that the provisions of schedule 26 are exclusive and not complementary to the main provisions relating to Permanent Establishments. We trust that this will be reflected in Revenue published guidance.''

Another general point is that the OECD model treaty does not contain anything along the lines of schedule 26, but I shall not take up that point because I have listened carefully to what the Paymaster General has said on the matching of these provisions with the OECD model treaty. I recognise that there are some distinctions to be drawn, not least to reflect the variation in more than 100 double tax treaties. I have been able to study some of those, but there are clearly various differences. I realise that that requires recognition in the drafting that the model cannot be adopted verbatim in all respects.

I hope that that proves to be a helpful explanation. It has taken not a little effort to reach this point, and I hope that the amendments are considered to be serious and to have a helpful intent. I hope that they will be accepted.

Dawn Primarolo (Labour, Bristol South)

I have listened carefully to what the hon. Member for Eddisbury has said in support of his amendments, but I am still at a loss to understand why he wishes to change a part of the Bill that has been in place and operated without complaint for the past eight years. Schedule 26 maintains the current rules in section 127 of the Finance Act 1995. I cannot remember whether the right hon. Member for Fylde was Financial Secretary then, but I shall absolutely forgive him if this measure does not immediately spring to the front of his memory.

These rules were introduced in the 1995 Act to remove a potential impediment to the City winning and maintaining its investment business with non-residents. I understand that the original rules were drawn up after extensive consultation with the City to ensure that they worked well. Having established the rules in 1995, which the Government think have now operated well for eight years, the schedule will bring those same rules forward.

I was rather surprised to hear the hon. Member for Eddisbury introduce amendments that would weaken the anti-avoidance provision in those rules. Normally, Ministers get to hear requests and lobbying for the weakening of anti-avoidance legislation, and the Inland Revenue certainly does, but that came as something of a surprise. I assure the hon. Gentleman that there has been no change, but I must tell him that it is not our intention to countenance any change either. Although we are not seeking to strengthen any of the anti-avoidance provisions of the Finance Act 1995, we certainly will not support an amendment that would relax the anti-avoidance provisions that have been in place for eight years.

The amendments would weaken the anti-avoidance provisions by introducing an either/or test, whereas the existing legislation requires both conditions to be met for investment managers, and the first test to be met by brokers. Although I absolutely commend the hon. Gentleman for avidly reading the 1995 Act, on this occasion the advice that he has been given may not have been entirely appropriate, and I hope that he will withdraw his amendment. If he seeks to press the amendment to a Division, I will recommend that my hon. Friends oppose it. I hope that that is clear.

The rules introduced in 1995 worked for eight years following extensive consultation. They are not anti-competition. The schedule will present those rules again in the context of the change of permanent establishments. The rules have not been tightened or changed, so there is no need to disturb them, and I hope that the hon. Gentleman will not.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General for setting out the matter so clearly. I could not help but detect a certain revelry in her response, for some reason. The year that I joined the Conservative party—let alone when I got involved in politics—was the year of that particular Finance Act.

Dawn Primarolo (Labour, Bristol South)

I apologise if there was just a touch of glee in what I said. The hon. Gentleman has spoken a great deal about anti-avoidance measures, and I am afraid that he has to carry his party's responsibility for things that it has done in this House, as I do for things that my party may have done in the past, or may do in future.

Stephen O'Brien (Conservative, Eddisbury)

I fully accept without question the terms of appeal that the Paymaster General has just offered. There is no intention on my part to weaken the anti-avoidance provisions, which is why the clarification is helpful. My intention was to achieve a certain internal consistency. The Paymaster General points out that the amendment might weaken the anti-avoidance provisions, which is completely contrary to what was in my mind in introducing the amendments. I am delighted to confirm that my right hon. Friend the Member for Fylde got it right first time.

Michael Jack (Conservative, Fylde)

I am grateful to my hon. Friend for the view that he has just formed. Although it may be a distant dot in the past, his understanding of it now must be entirely correct. I am delighted that on this occasion he appears to be taking the Paymaster General's advice.

Stephen O'Brien (Conservative, Eddisbury)

This unity across all parts of the Committee is really something, as I will certainly not press the amendment to a vote.

The advantage of going through these matters with a fresh eye is that we at times find that the Conservatives' record in the last Parliament was something that we can be very proud of. It has stood the test of time, so much so that the current Government feel that there is no room for improvement on the very successful policies that were in place at the time.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 26 agreed to.

Clause 152 - General replacement of refrences to

Stephen O'Brien (Conservative, Eddisbury)

I want to raise a short point on behalf of the Law Society. No amendment is proposed. The clause lists the instances in which the terms ''branch'' or ''agency'' are to be changed in the existing legislation. The Law Society says:

''We are concerned at how these changes are tracked through. For example, sub-clause (2) states that section 606(13) of the Taxes Act 1988 is amended, yet this section refers back to the definition in section 118 of the Taxes Management Act 1970, which is itself repealed in its entirety by Schedule 43 in the Bill.''

Is there a consequential amendment to come, possibly on Report?

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman rightly said that the clause replaces the term ''branch'' or ''agency'' by ''permanent establishment'' in the relevant parts of the Taxes Act 1988. He specifically asked about subsection (2). Section 606(13) of the 1988 Act is amended by schedule 27 of the Bill. As a result, there is no longer a reference to section 118 of the Taxes Management Act 1970. There is no error.

Stephen O'Brien (Conservative, Eddisbury)

I am grateful to the Paymaster General. That is noted and accepted.

Question put and agreed to.

Clause 152 ordered to stand part of the Bill.

Clause 153 - Double taxation relief: profits attributable

Stephen O'Brien (Conservative, Eddisbury)

The clause does not address the position of non-resident companies trading in the UK through permanent establishments, but is applicable to UK resident companies that have overseas permanent establishments. It amends section 797 of the Taxes Act 1988, which limits the credit for foreign taxes to the UK corporation tax rate.

The clause inserts into section 797 a new subsection (2A), which says that the chargeable profits attributable to an overseas permanent establishment are to be determined using, to coin another Latin phrase, mutatis mutandis, the rules in new section 11AA of the Taxes Act, introduced by clause 148(2) of the Bill for the purpose of taxing UK permanent establishments of non-resident companies.

Having explained the clause on that basis, I want to put it on the record that we regard the clause not only as unobjectionable, but as something that we support.

Question put and agreed to.

Clause 153 ordered to stand part of the Bill.

Clause 154 ordered to stand part of the Bill.

Schedule 27 agreed to.

Clause 155 - Overseas life insurance companies

Stephen O'Brien (Conservative, Eddisbury)

As I come to the last clause that I shall be dealing with before the Whitsun recess, I will be sharing a sigh of relief with all the other Committee members.

The clause gives the Treasury power to make regulations rewriting the tax treatment of overseas life insurance companies. It also applies to overseas life insurance companies the new rules on the treatment of permanent establishments contained in clauses 147 to 153 and schedules 26 and 27. The matter is of great concern. Some people have even argued that it is unacceptable to have the whole code by which overseas life insurance companies are taxed rewritten without adequate parliamentary scrutiny. The clause does not permit any consideration of the regulations by Parliament. It does not even contain any guidance as to the nature of the changes that might be made.

As a matter of principle, it would normally be my position, and that of Her Majesty's official Opposition, to consider voting against the clause in such circumstances, because that is critical, particularly when there is a code that affects a whole sector of business and when there has not been the necessary scrutiny, including sight of the general guidance and consideration of the regulations. However, I hope that the Paymaster General will provide an explanation, so I shall reserve my position until I have heard what she has to say.

John Burnett (Liberal Democrat, Torridge and West Devon)

I, too, was disturbed to read the clause, which is quite extraordinary. Not only will the regulations not have any parliamentary scrutiny, but some of them will be deemed to have had effect as from 1 January 2003. The Liberal Democrats also wait with baited breath to hear what the Paymaster General has to say. We hope that our quite justified fears will be allayed.

Dawn Primarolo (Labour, Bristol South)

There has been special legislation for overseas life insurance companies since 1915. There was a major reform of the legislation in 1993. Members of the Committee will not be surprised to hear that that legislation was long and complicated. Soon after its introduction, whether by coincidence or design, the number of overseas life insurance companies carrying on business in the United Kingdom declined rapidly. Now, the number of pages of legislation dealing with overseas life insurance companies is many times the number of the companies to which it applies. In the circumstances, I thought it sensible that the new rules for the non-resident companies in clauses 147 to 154 should be made to apply to the overseas life insurance companies, with all the necessary modification done in secondary legislation.

I entirely understand the point made by the hon. Members for Eddisbury and for Torridge and West Devon. On 16 April, the Inland Revenue published a draft of the regulations that will be made under the clause when it passes into law. The draft regulations are currently the subject of consultation with interested parties. I understand that there are currently six companies that will be affected. Once the consultation has been completed, although the regulations are subject to negative procedure, they will be considered in a Committee on Delegated Legislation. If the hon. Members for Torridge and West Devon and for Eddisbury have not received a copy of the draft regulations but would like one for bed-time reading, or if any member of the Committee would like a copy, I will ensure that copies are sent.

Given the difficulties that have existed in this area, I thought it best to proceed on the basis of consultation and agreement with the interested parties, of which there is a small number compared with other areas of taxation. At present, the regulations are being discussed with them. I would be happy to let members of the Committee know those organisations' views on the regulations.

Michael Jack (Conservative, Fylde)

The Paymaster General has given a very helpful explanation as to the meaning of the clause. Can she say why such a sparse explanation for the inclusion of this clause in the Bill was given in the notes on clauses? If it had been fuller, we might not have had to have a debate on the clause.

Dawn Primarolo (Labour, Bristol South)

I take note of the right hon. Gentleman's comments. Perhaps the information on the clause could have more specifically explained the situation. I am sure that he, better than anyone else in the Committee, knows that none of us can put our hand on our heart and say that the vast amounts of information that have to be made available are perfect. However, with hindsight, we might have done things slightly differently.

I hope that the explanation that I have given members of the Committee satisfies them. They will know that I take very seriously the matter of proper scrutiny by the House.

John Burnett (Liberal Democrat, Torridge and West Devon)

Can the Paymaster General give the Committee any indication of the ramifications of the regulations? The clause refers to overseas life insurance companies. Will the regulations have any consequences for UK taxpayers and UK tax-paying companies?

Dawn Primarolo (Labour, Bristol South)

I believe that the answer is no. It is a very specialised area, but I am confident that I am not misleading the hon. Gentleman or the Committee. However, I shall check and, if I am not correct, I shall write to the hon. Gentleman. My understanding is that there are no implications for UK taxpayers.

Stephen O'Brien (Conservative, Eddisbury)

I am genuinely grateful to the Paymaster General for setting that out and for recognising—it probably came as no surprise to her—that I was not aware of a consultation process with the interested parties. I believe that six companies are involved. The draft regulations have been published within a discrete net of interested parties but have not been placed in the Library, so they were not available to me. Therefore, I am glad that the matter has been raised.

I hope that the Paymaster General respects the fact that I indicated that I was not minded to vote against clause stand part if there was a satisfactory explanation. Therefore, I shall urge my hon. Friends not to vote against it, in the light of her commitment to letting us know the result of the consultation. It would be helpful if the draft regulations were placed in the Library, and she might wish to provide copies, dependent on what the rest of the Committee indicate to her, perhaps informally. I would have thought that the spokesmen for the parties would be interested in having a look at the regulations at this stage. I shall try to include them in my day-time rather than bed-time reading.

The answer that the Paymaster General gave to my right hon. Friend the Member for Fylde recognised their shared experience of office in their respective times. She said that it was wrong to criticise a deficiency in providing information, but the fact that it will now be remedied is helpful and respected. We shall not hold up progress, and will be happy to agree to stand part.

Question put and agreed to.

Clause 155 ordered to stand part of the Bill.

Nicholas Winterton (Conservative, Macclesfield)

I am sure that I speak for the whole Committee when I congratulate the hon. Member for Eddisbury on the marathon that he has undertaken. I wish him a restful Whitsun recess. Those remarks apply to the Economic Secretary, who has also undertaken a strenuous marathon.Clause 163 Avoidance affecting proceeds of balancing event

Clause 163 - Avoidance affecting proceeds

Howard Flight (Conservative, Arundel and South Downs)

I beg to move amendment No. 9, in

clause 163, page 106, line 9, at beginning insert 'or would' after the bracket.

Nicholas Winterton (Conservative, Macclesfield)

With this it will be convenient to discuss the following:

Amendment No. 10, in

clause 163, page 106, line 11, leave out subsection (2) and insert—

'(2) If, as a result of a tax avoidance scheme, the amount to be brought into account as the proceeds from the event is less than it would otherwise have been, the amount of any balancing allowance to which the taxpayer would otherwise be entitled shall be equal to the amount that (but for the provisions of this section) it would have been if the tax avoidance scheme had not been implemented.'.

Amendment No. 11, in

clause 163, page 106, line 17, after 'to', insert 'reduce or'.

Amendment No. 12, in

clause 163, page 106, line 19, at end insert 'in full'.

Howard Flight (Conservative, Arundel and South Downs)

Sir Nicholas, may I add my welcome to your chairmanship of the proceedings? You may have to listen to my voice for the next two sittings, so I shall be speedy.

Clause 163 introduces measures to counter an avoidance scheme, which should be blocked. The remedy it proposes is disproportionate to the abuse, however, because it denies the full amount of any balancing allowance that the asset owner claims rather than the proportion attributable to the scheme. The explanatory note is not strictly accurate because the detailed explanation refers to the denial of a balancing allowance on a fall in value, which is incorrect because the clause would entirely deny any allowance.

The Paymaster General knows that the amendment has the broad support of the Law Society and other professionals. She may argue that we should not pussyfoot around because the Government are trying to block tax avoidance, but it is traditional in British law that remedies should be proportionate. The amendment is designed to reduce the balancing allowance by the reduction in proceeds caused by the tax avoidance scheme, which is proportionate.

Dawn Primarolo (Labour, Bristol South)

I shall ask my hon. Friends to oppose the amendment to the anti-avoidance provision in clause 163, which seeks to limit the clause's potential deterrent effect. It would allow a business entering into a tax avoidance scheme a balancing allowance equal to the amount that the allowance might have been had the avoidance scheme not been entered into. That is the amendment's purpose, although its precise meaning was not entirely clear until the hon. Gentleman spelled it out.

Perhaps it would help if I explained the avoidance mechanism: if we allowed the avoidance scheme to continue it would cost the British taxpayer some £500 million in lost revenue over the next three years. This is how the scheme operates: company A owns an industrial building that qualifies for capital allowances with, for example, a value of £1 million. Company A borrows 110 per cent. of the unencumbered market value of the property—in the example, £1.1 million—from company B, which is another group member. The loan is secured by way of a charge over the property. Company A then sells the property subject to the charge to another group member, company C, for £1. The liability under the loan remains with company A. Company C then grants company A a lease of the property at a peppercorn rent. The effect of the scheme is to trigger a balance in allowance of the whole, unrelieved, qualifying expenditure: £1 million less £1. The broad effect is thus equivalent to an immediate, upfront allowance of 100 per cent. of the unrelieved capital charge. We are not prepared to tolerate that. That is not the purpose of the provisions that are in effect.

The scheme occurs in an area of tax law that gives some £25 billion of relief through capital allowances each year. The hon. Member for Arundel and South Downs wants it both ways. If a company gets caught using the avoidance scheme, we would pretend that it was not using it, but still allow it to have the balancing allowance. I quote from Lord Green in the case of Lord Howard de Walden v. Commissioners of Inland Revenue, from page 134 of ''25 Tax Cases'':

''It scarcely lies in the mouth of a taxpayer who plays with fire to complain of burnt fingers.''

The anti-avoidance provision is intended to send a clear message to deter people from engaging in the scheme. If they persist in using it, and the Inland Revenue reveals that, it is wholly inappropriate that they would get access to the balancing allowance, and I ask the Committee to reject the amendments.

Adam Price (Plaid Cymru, Carmarthen East and Dinefwr)

Perhaps the Paymaster General would give her response to the criticism that the definition of tax avoidance scheme under the clause is too broad. It defines a tax avoidance scheme or arrangement as one in which the main purpose, or one of the main purposes, is the obtaining of tax advantage by the taxpayer. How one defines what is the main purpose seems to have been left rather open-ended. For instance, it could be possible to argue that an arrangement has an improvement of the tax position as a purpose, but it was not the main purpose of the arrangement. There could be all sorts of debate about that. Would it not be preferable to define a tax avoidance scheme as one in which the sole or main purpose was the obtaining of the tax advantage?

Michael Jack (Conservative, Fylde)

This is one of those rare occasions when I rise to express sympathy with the view of the Paymaster General. I say to my hon. Friend the Member for Arundel and South Downs that had I been doing the same job as the Paymaster General, confronted with the enormity of the financial gain from a scheme such as this, I would have come down on it like a ton of bricks. There is a difference between sloppily drafted tax law that people take advantage of leading to the Treasury going somewhat over the top in trying to tie up their failings in the drafting, and the exploitation of a scheme. Someone has clearly looked at the provision and seen it as a way of driving a proverbial coach and horses through the spirit of the original legislation.

It is not that there were no capital allowances. It sounds from what the Paymaster General has said that the avoidance scheme has been exploited to such an extent that it goes against the spirit and purpose of the legislation. Under those circumstances, I do not blame the Revenue for trying to plug the hole. If someone has gone to the extent of obtaining professional advice to drive that coach and horses through the tax legislation, knowing exactly what they were about, I, for one, would not be in favour of giving them any mitigation because what seemed like a nice little earner is, rightly, cut off at the knees. Giving them a little something on the side is going over the top. I am less than sympathetic with my hon. Friend's amendment.

Howard Flight (Conservative, Arundel and South Downs)

I draw the Committee's attention to the fact that I said at the beginning that the clause counters an avoidance scheme that needs to be blocked. The Paymaster General did not respond to my second point that the notes on clauses describe incorrectly the way in which the clause operates, so it was entirely appropriate to ask about the balancing item. I understand the attitude of my right hon. Friend the Member for Fylde, but it has been a long-standing principle of British law that remedies should be proportionate. It is the general view of tax counsel that in this case it is inappropriate for the remedies not to be proportionate.

However, part of the purpose of the amendment was to probe the Minister and to discover exactly what was intended. When we debate subsequent clauses, we shall find that such problems often arise—as with the tonnage tax—when taxation is over-complicated. Incentives are exploited and we end up going round and round and making the legislation more complicated. The purpose of the allowances is obviously desirable economically, but they will tend to invite such problems.

Dawn Primarolo (Labour, Bristol South)

I know that the hon. Gentleman is fully aware of the way in which capital allowances and the legislation evolved under the preceding Government. The importance of capital allowances is clear. The hon. Gentleman referred to ambiguity in paragraph 12 of the notes on clauses, but there is clarity in the summary and details in the explanatory notes and there are just a couple of words at the end of the sentence that need not be there.

The hon. Member for East Carmarthen and Dinefwr (Adam Price) referred to precedent. We are following the precedent of the definition of avoidance in the capital allowances Acts, so it is a well-trodden path.

Mr. Burnett rose—

Dawn Primarolo (Labour, Bristol South)

The hon. Gentleman may not intervene on an intervention.

The rest of the debate is in Hansard.